Grant Tyson, a 27-year-old living in Arlington, 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 feels he can't afford a brand-new one. Recently, however, his friend Martin Grubbs has offered to sell Grant his fully loaded Subaru Outback 3.6R. Martin wants $ 26,900 for his Outback, which has been driven only 8,000 miles and is in very good condition. Grant 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 $ 6,500 short. He has two alternatives for obtaining the money.
Borrow $ 6,500 from the First National Bank of Arlington at a fixed rate of 7 percent per annum, simple interest. The loan would be repaid in equal monthly installments over a three-year (36-month) period.
Obtain a $ 6,500 installment loan requiring 36 monthly payments from the Arlington Teacher's Credit Union at a 5.5 percent stated rate of interest. The add-on method would be used to calculate the finance charges on this loan.
Using Exhibit 7.6 or a financial calculator, determine the required monthly payments if the loan is taken out at First National Bank of Arlington. Round the answer to the nearest cent.
$ per month
Compute the finance charges on the loan offered by First National Bank of Arlington. Round the answer to the nearest cent.
$
Compute the APR on the loan offered by First National Bank of Arlington. Round the answer to the nearest whole percentage.
%
Determine the size of the monthly payment required on the loan from the Arlington Teacher's Credit Union. Round the answer to the nearest cent.
$ per month
Compute the finance charges on the loan offered by the Arlington Teacher's Credit Union. Round the answer to the nearest cent.
$
Compute the APR on the loan offered by the Arlington Teacher's Credit Union. Round the answer to the nearest whole percentage.
%
Compare the two loans and recommend one of them to Grant.
Explain your recommendation.