4) The Sampsons hope to have net cash flows of about $1,000 before considering their payment on a new car loan, but the main reason the Sampsons do not want a car payment of more than $500 is that they also want to save for their children’s college education. Offer your opinion on whether they should use some of their savings for their children’s college education to increase the car loan payment and therefore pay off the car loan more quickly.
 

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Recall from the previous chapter that the Sampsons had savings of $3,000 and credit card debt of $2,000. Assume that they have now paid off their credit card debt and have also accumulated total savings of $5,000 that they will use as a down payment on a new car. Sharon's new car is priced at $25,000 plus 5% sales tax. She will receive a $1,000 trade-in credit on her existing car and will make a $5,000 down payment on the new car. The Sampsons would like to allocate a maximum of $500 per month to the loan payments on Sharon's new car. The annual interest rate on a car loan is currently 7%. They would prefer to have a relatively short loan maturity, but cannot afford a monthly payment higher than $500. 1. Advise the Sampsons on possible loan maturities. Access an online loan payment calculator. Input information to determine the possible monthly car payments for a three-year (36-month) payment period, a four-year (48-month) period, and a five-year (60-month) period. Enter the results in the following table: Three-Year (36- Four-Year (48- Five-Year (60- month) Period month) Period month) Period Interest rate 7% 7% 7% Monthly payment Total finance payments Total payments including the down payment and the trade-in 2. What are the trade-offs among the three alternative loan maturities? 3. Based on the information on finance payments that you retrieved from the loan payment Web site, advise the Sampsons on the best loan maturity for their needs. Recall from the previous chapter that the Sampsons had savings of $3,000 and credit card debt of $2,000. Assume that they have now paid off their credit card debt and have also accumulated total savings of $5,000 that they will use as a down payment on a new car. Sharon's new car is priced at $25,000 plus 5% sales tax. She will receive a $1,000 trade-in credit on her existing car and will make a $5,000 down payment on the new car. The Sampsons would like to allocate a maximum of $500 per month to the loan payments on Sharon's new car. The annual interest rate on a car loan is currently 7%. They would prefer to have a relatively short loan maturity, but cannot afford a monthly payment higher than $500. 1. Advise the Sampsons on possible loan maturities. Access an online loan payment calculator. Input information to determine the possible monthly car payments for a three-year (36-month) payment period, a four-year (48-month) period, and a five-year (60-month) period. Enter the results in the following table: Three-Year (36- Four-Year (48- Five-Year (60- month) Period month) Period month) Period Interest rate 7% 7% 7% Monthly payment Total finance payments Total payments including the down payment and the trade-in 2. What are the trade-offs among the three alternative loan maturities? 3. Based on the information on finance payments that you retrieved from the loan payment Web site, advise the Sampsons on the best loan maturity for their needs.

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