If the interest rate is 6% compounded monthly, how large will the balloon payment be?

Question

A car is purchased for $6287.10 with $2000 down and a loan to be repaid $100 a month for 3 years followed by a balloon payment.

Answer 1

I won't do this for you -- but will tell you how to do it.

The present value of your payments has to be $6287.10.

You pay $2000 now, so the PV of the remaining value has to be $4287.10.

This remaining value has two parts -- the value of the annuity and the value of the balloon payment.
If the balloon payment is paid at year three -- you really only have 35 monthly payments of $100. The value of this annuity is:

PV_A = 100/r - 100/[r*(1+r)^35]

Here PV_A is the present value of the annuity and r is the monthly interest rate (5%/12 = 0.5%)

This means that the PV of the balloon payment is equal to X = $4287.10-PV_A.

The balloon payment is equal to the future value of that -- which is equal to X*(1+r)^36

Good luck.

Answer 2

This would be a really bad idea.

Buy a cheaper car. Avoid balloon payments.

Answer 3

2000(1 x interest/12)^x = your answer