Assume that you are on your way to purchase a new car. You have already applied and been accepted for an automobile loan through your local credit union. The loan can be for an amount up to $25,000, depending on the final price of the car you choose. The terms of the loan call for monthly payments for a period of four years at a stated interest rate equal to 6 percent. After selecting the car you want, you negotiate with the sales representative and agree on a purchase price of $24,000, which does not include any rebates or incentives. The rebate on the car you chose is $3,000. The dealer offers “0% financing,” but you forfeit the $3,000 rebate if you take the “0% financing.”
a. What are the monthly payments that you will have to make if you take the “0% financing”?
b. What are the monthly payments if you finance the car with the credit union loan?
c. Should you use the “0% financing” loan or the credit union loan to finance the car?
d. Assume that it is two years later, and you have decided to repay the amount you owe on the automobile loan. How much must you repay if you chose the dealer’s “0% financing”? The credit union loan?