If you found both a new and used car for $15,000, how large of an effect do you think the interest rate will have on the total you have to pay your parents at the end of 5 years?

Question

You are going to buy a car. As you can't qualify for a good rate yet, your parents will take out the loan and you need to pay them back for the total of the car plus all interest at the end of the 5 years. You will find that if you buy a new car, your parents can get a 3.9% interest rate on the loan. If you buy a used car, your parents can get 11.9% interest on the loan.

Answer 1

Assuming simple interest applies the interest on the new car is 15000×0.039×5 ($2925).

On the used car it’s 15000×0.119×5 ($8925)

The difference between these is 15000×0.08×5=$6000, you will need to pay them an additional $6000 in five years’ time for buying the used car.

The new car repayment is $17,925 and the used car repayment is $23,925.