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What exactly does this mean (in terms of cash flows per year say):

There is a $10,000 truck. A $2,000 down payment and 24 equal monthly payments (with the first payment in one month) at 8% compounded quarterly.

I'm having trouble visualizing this. You're down $2,000 at time 0. Then do you pay ($10,000-$2,000)/24 every month. But the interest is calculated on what? The remaining left to be paid?

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Auto loans are usually amortized over the life of the loan. This means that you pay more interest at the beginning of the loan, and pay more principal at the end.

Per wikipedia, you calculate amortized payments as follows:

The fixed monthly payment P for a loan of L for n months and a monthly interest rate c

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  • So would I use this equation by substituting L = 8000, n = 24 and c = 7.94%? Seeing as the loan is really for 8000$ (10000-2000) and 8% quarterly represents 9.94% monthly right? Or are my calculations off?
    – nopcorn
    Commented Oct 17, 2011 at 21:34
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The interest would be calculated on the average daily balance remaining over the quarter in a real world bank.

In a school house bank (read in homework) its possible that the interest would simply be calculated on the remaining balance of the loan on the last day of the quarter.

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    The average daily balance method is typically used for "revolving" credit lines like credit cards. Installment loans for a fixed asset like a car are usually amortized. Commented Oct 17, 2011 at 21:29
  • @duffbeer703 - True but this is a homework question as lets face it no bank is going to compound the interest owed to them quarterly.
    – user4127
    Commented Oct 18, 2011 at 13:08

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