I went to Honest Furniture and bought some furniture worth $1000. Since I did no

Question

I went to Honest Furniture and bought some furniture worth $1000. Since I did not have
cash to pay for the purchase, the owner, Mr. Honest, told me that he will help me out and
arrange a payment plan. He said he normally charges 12% interest per year. He calculated
the interest on $1000 at 12% as $120, which makes the total $1120. He then divided
$1120 by 12 months, which makes the monthly payment $93.33.
He then said, "I feel generous today, just pay me $90 at the end of each month for a
year." I was so excited that Mr. Honest was so nice to me and making me this great deal.
But in my gut, I felt like I was being taken to cleaners. Is that true?

Explanation / Answer

When you pay $90 at the end of every month for a year it amounts to $ 1080.

When given interest at 12%, it makes the total to $ 1120

So the difference between the two is $ 40

Since you are paying in monthly installment, Mr. Honest will lose about $ 3.33 every month because he allowed you a discount of $ 3.33 every month.

There is nothing to feel like you being taken to cleaners because to retain the customers, generally the owners of the shop will provide you some discounts. This is generally business practice.

So losing of $ 3.33 every month by Mr. Honest will actually make the customers as regular to his shop.

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