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Chapter 7

Financial Planning Exercise 10

Comparing payments and APRs of financing alternatives

Because of a job change, Finn McBryde has just relocated to the southeastern United States. He sold his furniture before he moved, so he's now shopping for new furnishings. At a local furniture store, he's found an assortment of couches, chairs, tables, and beds that he thinks would look great in his new, two-bedroom apartment; the total cost for everything is $6,400. Because of moving costs, Finn is a bit short of cash right now, so he's decided to take out an installment loan for $6,400 to pay for the furniture. The furniture store offers to lend him the money for 48 months at an add-on interest rate of 8.5 percent. The credit union at Finn's firm offers to lend him the money - they'll give him the loan at a simple interest rate of 12.5 percent, but only for a term of 18 months.

aCompute the monthly payments for the loan from the furniture store.Round the answer to the nearest cent.

$per month

bDetermine the APR for the loan from the furniture store.Round the answer to 2 decimal places.

%

c.Determine the APR for the loan from the credit union.Round the answer to 2 decimal places.

%

dWhich is more important: low payments or a low APR