Real World Applications – Algebra I
Taking out a Loan to Purchase a Car
When making big purchases, such as buying a house or a vehicle, people usually don’t have all of the money to make the purchase. They usually take out loans from a bank to help make the big purchase, and then the person pays the bank back over time.
Let’s say we want to take a step into becoming more independent and want to buy a used car. Used cars can run around $20,000. Unfortunately, you only have only saved a certain amount of money at the time. We can look into two different banks that can help us out with the loan, and use different strategies to find out which bank would give us the better deal that would match our needs.
Let’s say the first bank will let us initially put down $2,500 and pay $150 per month. Let’s also say that another bank has convinced us that if we put down more money, the monthly payment would be lower (which is usually the case). This second bank has told us that if we put down $3,000, we can pay $125 a month.
There are a few questions to help us decide which would be the better option for us.
Now divide both sides by 25 to isolate the variable.
We have to answer our question, which was asking how long it would take for the payments to be the same? So, it would take 20 months for the payments to be the same.
We can also look at which bank loan is “better.” On one hand, the “better” deal might mean paying more every month with a low down payment. On the other hand, the “better” deal might mean paying more as a down payment and then paying less every month. Which do you think is the better deal?
We can use the four-step problem-solving plan to help us answer this question.
Step 1 is to understand the problem. We know what a down payment is, and we know what monthly payments are. We are trying to figure out which is the better deal.
Step 2 is to devise a plan. For this plan, we need to interpret what the “better deal” means to us. What we can do is substitute different numbers in the monthly plan for each loan and interpret the results.
Step 3 is to carry out the plan and solve. Let’s go ahead and substitute some numbers and figure out what it means.
The first loan has a down payment of $2,500 and a monthly payment of $150. The second loan has a down payment of $3,000 and a monthly payment of $125. Let’s find out how much total we would have paid for 15 months.
If the loan was a total of $5,500, the first loan would be the best choice, since it more would be paid off in 20 months. If the loan is more than $5,500 (which for this car, it is), then the second loan is the better option.
One step further: How could you convince someone that the first option is the best loan choice?
As we grow up to be independent and mature adults, we take responsibilities like making big purchases. Try researching a big purchase, such as a home or a car, and find out how much it costs. Then research two different banks (or the car dealership, since they have payment plans as well). Find out which is your interpretation of a “better” deal. What would this mean to you? Which payment plan would you choose, and why?