As the end of the year approaches rapidly, we’ll now shift our focus toward understanding money and finance. Our first exploration will look at how interest rates and the duration of loans combine to impact the cost of borrowing money.
As you complete your homework, you’ll need to use an online calculator to find the monthly payment for a given set of loan terms. One calculator can be found at Bankrate.com. Alternatively, you can use an Nspire calculator with the function tvmPmt. The required parameters for the function are: number of months, interest rate (leave off the percent), loan amount, 0 (zero), 12, 12. For a loan of $5,000 for 36 months at 15% interest, your function would be entered as tvmPmt(36,15,5000,0,12,12) and would return -173.327. You should get the same result entering those criteria on a web-based calculator.
If you want to calculate the old-fashioned way, you can use the following formula.
You will have to convert the annual interest rate in percent to decimal and divide by 12 to get the monthly interest rate.
Personally, I’d stick with the web calculator, but I thought you might like to see the alternatives.
In class we mostly discussed short-term loans. You may have heard the President encouraging people to convert to 15 year mortgages. Compare these two options.
Joanne purchases a $150,000 home using a 30 year mortgage at 5.5% interest.
Bob purchases a similar $150,000 home with a 15 year mortgage at 5.5% interest.
What is the cost of each loan? How much more interest will Joanne pay compared to Bob?