You are purchasing a car today that costs $25,000. You have been given the following financing options for the car. Option 1 is conventional 4-year financing at an interest rate of 4%, compounded monthly. This option requires monthly payments. Option 2 is a balloon loan which requires monthly payments of $375 for 2 years and then a final balloon payment for the remaining balance. The interest rate on this loan is 2.5%.
What is the payment for the conventional loan (option 1)?
Prepare an amortization schedule for option 1.
What will the balloon payment be for the balloon loan (option 2)?
Prepare an amortization schedule for option 2.
Which option do you prefer and why? What additional considerations are there with respect to the balloon loan.