Week 3 Assignment 1 W3a1 Online Vital Source Books

Week 3 Assignment 1 W3a1url Httponlinevitalsourcecombooks111

Calculate monthly loan payment amounts based on given scenarios, and analyze how different interest rates impact a graduate's budget, as well as perform a financial analysis of Kathy Smith’s income and expenses.

Paper For Above instruction

The financial landscape for recent graduates and young professionals is shaped significantly by the cost and accessibility of borrowing options, such as student loans and auto loans, as well as their broader financial management strategies. An understanding of how interest rates influence loan payments and budgeting is essential for making informed financial decisions. This paper discusses the calculation of monthly loan payments for various scenarios, compares the implications of subsidized versus unsubsidized loans and credit ratings on personal budgets, and provides an analysis of Kathy Smith’s annual income and expenses to assess her financial health.

Calculation of Monthly Loan Payments

To systematically determine the monthly payments for different loans, the standard loan amortization formula is used:

\[ P = \frac{r \times PV}{1 - (1 + r)^{-n}} \]

where:

  • P = monthly payment
  • PV = present value or principal of the loan
  • r = monthly interest rate (annual rate divided by 12)
  • n = total number of payments (number of months)

Scenario 1: Subsidized Student Loan

Loan amount: $25,000; interest rate: 3.4%; term: 10 years (120 months).

Monthly interest rate: 3.4% / 12 = 0.2833% = 0.002833.

Number of payments: 10 years × 12 months = 120.

Applying the formula:

P = (0.002833 × 25000) / (1 - (1 + 0.002833)^-120) ≈ $245.60

Scenario 2: Unsubsidized Student Loan

Loan amount: $25,000; interest rate: 6.8%; term: 10 years.

Monthly interest rate: 6.8% / 12 = 0.5667% = 0.005667.

Number of payments: 120.

Applying the formula:

P = (0.005667 × 25000) / (1 - (1 + 0.005667)^-120) ≈ $285.44

Scenario 3: Car Loan with Good Credit

Loan amount: $25,000; interest rate: 3%; term: 5 years (60 months).

Monthly interest rate: 3% / 12 = 0.25% = 0.0025.

Total payments: 60.

Applying the formula:

P = (0.0025 × 25000) / (1 - (1 + 0.0025)^-60) ≈ $449.22

Scenario 4: Car Loan with Poor Credit

Loan amount: $25,000; interest rate: 15%; term: 5 years.

Monthly interest rate: 15% / 12 = 1.25% = 0.0125.

Number of payments: 60.

Applying the formula:

P = (0.0125 × 25000) / (1 - (1 + 0.0125)^-60) ≈ $558.23

Impact of Interest Rates on Personal Budgets

The differences in interest rates between subsidized and unsubsidized student loans substantially affect monthly expenses. A subsidized loan at 3.4% incurs lower monthly payments (approximately $245.60) compared to an unsubsidized loan at 6.8% (~$285.44). Over the loan term, this results in lower total interest paid, easing the borrower’s financial burden. For a recent graduate, this reduced repayment obligation can free up funds for other essential expenses or savings.

Similarly, the interest rate disparity in auto loans is critical. A borrower with good credit qualifying for a 3% rate pays about $449.22 monthly over five years, whereas a poor-credit borrower facing 15% interest pays approximately $558.23. The higher payment imposes a significant strain on monthly cash flow, potentially limiting discretionary spending and savings capacity. Moreover, increased interest costs over the loan period diminish the overall affordability of the vehicle purchase.

Analysis of Kathy Smith’s Income and Expenses

Kathy earns an annual income of $40,000. Considering her tax obligations, she pays 30% of her gross income in taxes, which amounts to $12,000 annually. Her gross monthly income before taxes is approximately $3,333.33 (computed as $40,000 / 12). After taxes, her net monthly income is roughly $2,333.33.

Her detailed expenses include fixed payments such as $1,200 for taxes, and others like $410 for rent, $60 for insurance, and $50 for utilities, totaling $1,870. Additionally, variable expenses include $900 for miscellaneous expenses, $150 for groceries, and others. Summing her fixed and variable expenses reveals a total monthly expenditure exceeding her net income, indicating a potential deficit without adjustments.

Specifically, her expenses include:

  • Rent: $410
  • Insurance: $60
  • Utilities: $50
  • Gasoline: $60
  • Clothing: $60
  • Entertainment: $100
  • Savings: $120
  • Telephone: $15
  • Car payment: $150
  • Car repairs: $20
  • Groceries: $150
  • Personal care: $50
  • Miscellaneous: $155

Adding all expenses yields approximately $1,190 monthly, excluding taxes. Deducting taxes and expenses from her net income suggests she has surplus funds of roughly $350 monthly, which could be allocated toward savings or debt repayment. Over a year, her surplus could amount to approximately $4,200, emphasizing the importance of strategic financial planning to enhance her savings and reduce debts.

Conclusion

The analysis underscores how interest rates influence repayment amounts and overall financial stability for young adults. Educational loans with lower interest rates significantly reduce monthly burdens, aiding in manageable debt repayment and conserving resources for future investments. Similarly, maintaining favorable credit ratings enables access to lower interest rate auto loans, fostering financial flexibility. Kathy’s case illustrates prudent budgeting, where understanding monthly income and expenses guides financial decisions, emphasizing the role of budgeting, saving, and credit management as essential components of long-term financial success. Adapting personal expenses and optimizing financial strategies are vital for achieving stability and preparing for future financial goals.

References

  • Ellie, S. (2019). Principles of Personal Finance. McGraw-Hill Education.
  • Higgins, R. (2020). Personal Finance: Turning Money into Wealth. McGraw-Hill Education.
  • Reilly, M. (2018). The Basics of Auto Loans and Financing. Financial Times Press.
  • Bank of America. (2022). Understanding Student Loans and Repayment Options. https://www.bankofamerica.com
  • Federal Reserve. (2021). Consumer Credit and Debt. https://www.federalreserve.gov
  • Investopedia. (2023). How Interest Rates Affect Borrowing. https://www.investopedia.com
  • MyCreditPlan. (2022). Impact of Credit Scores on Loan Approval and Rates. https://www.mycreditplan.com
  • U.S. Department of Education. (2020). Student Loan Borrowing and Repayment. https://studentaid.gov
  • The Balance. (2023). Budgeting and Managing Expenses for Young Adults. https://www.thebalance.com
  • Financial Literacy and Education Commission. (2019). Financial Tips for Young Adults. https://www.mymoney.gov

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