You have decided to purchase a new automobile with a hyprid-fueled engine and a
ID: 2495544 • Letter: Y
Question
You have decided to purchase a new automobile with a hyprid-fueled engine and a six-speed transmission. After the trade-in of your present car, the purchase price of the new automobile is 530,000. This balance can be financed by an auto dealer at 3%APR with payment over 48 months. Alternatively, you can get a $2000 discount on the purchase price if you finance the loan balance at an APR of 9% over 48 months. Should you accept the 3 % finance plan or accept the dealer's offer of a $2000 rebate with 9% Financing ? Both APR are compounded monthly.Explanation / Answer
In the first case:
Loan principle amount is = $30000.
The financial scheme is using 3% APR for payment over 48 months.
For EMI formula is EMI = = P×r×(1 + r)n/((1 + r)n - 1)
Where P = $30000,
r = 3/1200, since APR is 3%, monthly rate would be 3/12%
n = 48
Calculating above, EMI = $664
Total Interest paid during loan tenure = $1873
Total amount paid (Principle + interest) = $31873.
In the Second case:
Loan principle amount is = $28000, since dealer has given $2000 discount
The financial scheme is using 9% APR for payment over 48 months.
For EMI formula is EMI = = P×r×(1 + r)n/((1 + r)n - 1)
Where P = $28000,
r = 9/1200, since APR is 3%, monthly rate would be 9/12%
n = 48
Calculating above, EMI = $696.8
Total Interest paid during loan tenure = $5445
Total amount paid (Principle + interest) = $33445.
Final outcome:
Even though second scheme looks attractive because of $2000 discount, it is inferior to first scheme financially. Since the buyer has to pay
Hence the buyer should accept the 3% finance plan
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