Chapter $7-$ Using Consumer Loans

Michael Gets His Outback

Michael Roddick, a $27-$year$-$old bachelor living in Charlottesville, Virginia, has been a high$-$school teacher for five years. For the past four months, he's been

thinking about buying a Subaru Outback, but he feels that he can't afford a brand$-$new one. Recently, however, his friend Herb Keller has offered to sell

Michael his fully loaded Subaru Outback $3\mathrm{.}6$R$.$ Herb wants $$26,900$ for his Outback, which has been driven only $8,000$ miles and is in very good condition.

Michael is eager to buy the vehicle but has only $$10,000$ in his savings account at Central Bank. He expects to net $$8,000$ from the sale of his Chevrolet

Malibu, but this will still leave him about $$8,900$ short. He has two alternatives for obtaining the money:

Borrow $$8,900$ from the First National Bank of Charlottesville at a fixed rate of $6$ percent per annum, simple interest. The loan would be repaid in equal

monthly installments over a three$-$year $(36-$month$)$ period.

Obtain a $$8,900$ installment loan requiring $36$ monthly payments from the Charlottesville Teacher's Credit Union at a $4\mathrm{.}5$ percent stated rate of

interest. The add$-$to method would be used to calculate the finance charges on this loan.

Answer the following questions:

Using Exhibit $7\mathrm{.}5$ or a financial calculator, determine the required monthly payments if the loan is taken out at First National Bank of Charlottesville.

Compute $($a$)$ the finance charges and $($b$)$ the APR on the loan offered by First National Bank of Charlottesville.

Determine the size of the monthly payment required on the loan from the Charlottesville Teacher's Credit Union.

Compute $($a$)$ the finance charges and $($b$)$ the APR on the loan offered by the Charlottesville Teacher's Credit Union.

Compare the two loans and recommend one of them to Michael. Explain your recommendation.