Economics / Unit 12: Personal Finance
12.5 Loans: Cars, College and Homes
Notes
- The total cost of a loan is all payments added together; total interest is total payments minus the amount borrowed.
- Worked example: an $18,000 car loan with payments of $350 for 60 months costs $350 \times 60 = 21{,}000$ dollars, so interest is $21{,}000 - 18{,}000 = 3{,}000$ dollars.
- A longer loan term lowers the monthly payment but usually raises the total interest paid.
- Student loans: federal loans have fixed rates and flexible repayment options; on subsidized federal loans the government pays the interest while the student is in school. Private loans from banks may have variable rates and fewer protections. Grants and scholarships do not have to be repaid.
- A mortgage is a loan to buy a home, secured by the home. A larger down payment lowers the amount borrowed. Early payments go mostly to interest; later payments go mostly to principal (amortization).
- Fixed-rate loans keep the same rate; variable (adjustable) rate loans can change.
- Payday loans and other high-cost short-term loans can carry extremely high APRs and trap borrowers in debt.
Practice
A $10,500 car loan is repaid with 48 monthly payments of $250. How much interest is paid in total?
Total payments are $250 \times 48 = 12{,}000$, and $12{,}000 - 10{,}500 = 1{,}500$.
A family buys a $300,000 home with a $20\%$ down payment. How much do they borrow?
Down payment $= 0.20 \times 300{,}000 = 60{,}000$, so they borrow $300{,}000 - 60{,}000 = 240{,}000$.
Choosing a 72-month car loan instead of a 48-month loan at the same rate usually means:
Spreading payments over more months lowers each payment but adds months of interest.
Ready for more? Take the Unit 12 test.