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Finance Question - Add On Method (Paul is buying a new boat...)?
Paul is buying a new boat for $17,000. The dealer is charging him an annual interest rate of 8.5% and is using the add-on method to compute his monthly payments.
If he wants to have monthly payments of $350, how large should his down payment be?
I know the answer is: $2263.16.
Can someone please walk me through step-by-step how this answer was attained.
Thank you!
1 Answer
- ProfLv 77 years agoFavorite Answer
It seems that your information is incomplete. Add-on interest simply means that the dealer is adding the interest to the amount of the loan and then dividing the result by the number of payments.
So with the down payment you say is correct, the loan is $17,000 - 2,263.16 = $14,736.84
Now 14,736.84 * 1.085 = 15,989.47. Divided by 12 months, the monthly payment is $1,332.46, not anywhere close to the $350 he can afford to pay. The problem is that the above assumes a one-year loan. But what you really have is a 5-year loan, and you don't provide that informaion
So you have $350 * 60 months = $21,000
Then add-on interest is: LOAN + LOAN * .085 * 5 years = $21,000
= LOAN + LOAN* (.425)
= Loan * (1.425) = 21,000
Loan = 21,000 / 1.425 = 14,736.84
Without knowing it's a 5-year loan you can't solve the problem.