shopping for a loan essay

This assignment meets the General Education Program Objectives: Make Connections and Problem Solving.

Answer the following questions in essay format. Please use complete sentences with proper grammar. I recommend using a paragraph for each question. You do not need to include the question/prompt in the essay. If you’d like to have an introductory paragraph and/or conclusion, that’s fine. This assignment will be part of your General Education portfolio, which means I am not the only person in your audience. Write the essay as if you were explaining your mathematical processes and reasoning to your neighbor, your other CWI instructors, or your potential employer. Please discuss relevant formulas and use data to explain your reasoning. 1-2 pages in length is appropriate.

1. Suppose that you are shopping for loan to purchase a house or a car. Assume that the interest on the loan will be compounded monthly.

a) What amount are you willing to pay each month toward the loan? Use this amount as your monthly payment.

b) How long do you expect to pay on the loan? (Home loans typically have 15 year, 20 year, or 30 year terms. Car loans typically have 3 year, 4 year, or 5 year terms.)

c) What is the current interest rate for the term you chose? Check a website for interest rates or contact your local financial institution to find the current rates and assume that you qualify for the advertised interest rate. State where you found your information in your essay.

d) What is the largest loan amount you can borrow based on your answers to parts a, b, and c?

e) If you decide to borrow the maximum loan amount and make each monthly payment on time (without making extra payments toward the principal), what is the total amount you will pay over the life of the loan?

f) What is the total amount of interest that you would pay?

2. Repeat question #1 using a different term for the loan for part b). Remember this may affect the interest rate. How did using a different term change the amount of interest you would pay?

3. Repeat question #1 using a smaller value for the interest rate for part c). How does this affect the amount of interest you would pay?

4. How would you determine if borrowing was ultimately a good decision?

5. What did you learn from this activity?