You just graduated college and want to celebrate by buying a new car. The car yo

Question

You just graduated college and want to celebrate by buying a new car. The car you like can be purchased for $35,000. Your old college clunker is worth $4,000 on a trade. The car dealership is offering two payment methods, both of which will require taking out a loan and paying it back at the end of each month for 5 years beginning at the end of month 1.

a) Method 1: The dealer is offering 0.9% per year financing on the entire purchase price. What is the monthly loan payment?

b) Method 2: You can take a rebate of $2,500 cash and loan the remaining amount of money at 2.9% per year. What is the month loan payment under this option?

Explanation / Answer

Option 1 – Buying New Now

The dealer is offering 0.9% per year financing on the entire purchase price

Amount to borrow = 35000 - 4000 = $31000

Time to repay = 5 years

Interest rate = 0.9%

EMI =$529.

OPTION2 :

Amount to borrow = 35000 - 4000 - 2500 = $28500

Time to repay = 5 years

Interest rate = 2.9%

EMI =$511.

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