A car dealer is offering to a buyer one of two incentives: zero percent financin

Question

A car dealer is offering to a buyer one of two incentives: zero percent financing or $3,000 cash back. If the car price (before the incentives) is $25,000, find the following to compare the two options in terms of monthly payments.

a. Financing through the dealer – Find the monthly payment to the car dealer for a $25,000 loan at zero percent interest for 5 years.

b. Financing through a bank – Find the monthly payment to a bank for a 5 year loan at 6% when the buyer finances the $22,000 cost through a bank (i.e. the buyer takes the $3,000 cash back incentive).

Explanation / Answer

Option 1:- Financing through the Dealer Monthly Payment = $ 25000/ 60 month = $ 416.67 Option 2 :- Financing Through Bank @ 6% of $ 22000 after incentive of $ 3000 EMI = [P x R x (1+R)^N]/[(1+R)^N-1], where P stands for the loan amount or principal, R is the interest rate per month and N is the number of monthly instalments EMI = [22000 x 6/12 x (1+6/12)^60/[(1+6/12)^60-1] EMI = $ 425.31 Total Payment = $ 425.31 X 60 = $ 25519 Therefore Option 1 is better instead of option 2 as EMI is lower in Option 1.

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