Katie is looking to buy a car and is shopping around one day. The dealer pitches Katie on the idea of buying a car with a car loan. Katie has no interest in getting a car loan as she despises consumer debt, but she likes practicing with her calculator and wants to determine what her monthly payments would be on the new car loan. The loan is for $25,000, it would last for 5 years (60 months) with an interest rate of 4%. The loan would also be fully amortized, meaning that so long as the required payments are made, the loan would be paid off in 5 years. What would Katie's monthly payments be in this situation?
Answer (These are the numbers to input into your HP 10bii financial calculator):
N (stands for "number") = 60 (these are the number of months that the loan will last)
I/YR (stands for "interest rate/year") = 4% (this is the interest rate of the loan)
PV (stands for "present value" of the loan) = $25,000 (this is the amount of loan that Katie will receive. Note that the number is positive as she is receiving the "benefit" of the loan by getting a car.)
PMT (stands for "payments") = ??? (This is what we are solving. We want to see how much she will pay every month)
FV (stands for "future value") = 0 (this loan will be paid off when the term ends in 60 months)
After entering in the numbers above, solve for the payments by hitting the "PMT" button. The monthly payments are -$460.41. This is the amount that Katie would have to pay every month if she took the car loan.