Understanding Car Loan Amortization with Excel
This assignment explores car loan amortization schedules using Microsoft Excel. We will calculate the monthly payments and interest paid over a seven-year loan term.
Steps:
- Car Selection: Choose a car you’d like to purchase and find its asking price (e.g., using online car listings).
- Down Payment: Calculate a 10% down payment from the asking price.
- Loan Amount: Subtract the down payment from the asking price to determine the loan amount.
- Interest Rate: Research your area’s current auto loan interest rates using a reliable source like Bankrate. Divide the annual rate by 12 to get the monthly interest rate. Note: Auto loans typically follow the Rule of 78, which front-loads interest payments compared to a simple interest calculation.
- Amortization Schedule: Create an amortization schedule in Excel with the following columns:
- Month
- Payment Amount (This will be calculated using a formula)
- Interest Paid (Calculated using the loan balance and monthly interest rate)
- Principal Paid (Payment amount minus Interest Paid)
- Remaining Loan Balance (Previous balance minus Principal Paid) Embed the formulas in each cell so anyone can see the calculations.
- Loan Term: Extend the schedule for seven years (84 months).
Discussion:
After completing the amortization schedule, analyze the results:
- Total Interest Paid: Sum the total payments in the “Interest Paid” column and subtract the original loan amount. This represents the total interest expense over the loan term.
- Rule of 78 Impact: Discuss how the Rule of 78 affects the interest distribution compared to a simple interest calculation.
Important Considerations:
- This exercise assumes you will pay off the loan within seven years, which is unlikely due to the Rule of 78’s effect. In reality, you might trade in the car before the loan term ends.
- Remember, this is a simplified example. Additional loan fees and taxes might be involved in an actual car purchase.
- Next Steps:
- Complete the car selection, loan calculation, and amortization schedule in Excel.
- Analyze the results and post a discussion thread with your findings, including the total interest paid and the impact of the Rule of 78.
