Question

Kyle Parker of Fayetteville, Arkansas, has been shopping for a new car for several weeks. So far, he has negotiated a price of $27,000\$ 27,000 on a model that carries a choice of a $2500\$ 2500 rebate or dealer financing at 22 percent APR. The dealer loan would require a $1000\$ 1000 down payment and a monthly payment of $564\$564 for 4848 months. Kyle has also arranged for a loan from his bank with a 77 percent APR. Use the Decision-Making Worksheet on page 224224 to advise Kyle about whether he should use the dealer financing or take the rebate and use the financing from the bank.

Solution

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First we must find the financial charge for the dealer financing if the rebate is not taken. We will subtract the value of her loan (purchase price minus down payment) from the total amount paid to the bank.

(564 x 48) - (27,000 - 1,000)

27,072 - 26,000 = 1,072

We will assume that the $1,000\$1,000 down payment will also be applied if Kyle chooses to take the rebate.

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