The following are two popular approaches used by automobile dealers:
(a) Cash Rebate Versus Low Rate Dealer Financing You are given two mutually exclusive options from the dealer on a $20,000 car:
(i) $1,500 cash rebate or (ii) 36-month low rate loan at 3% APR. The prevailing APR on 36-month auto loan from a typical bank is 8%. Which option is a better deal?
(b) Buying Versus Leasing You are interested in a $25,000 car. A simplified leasing contract includes the following:
(i) up-front cost of $3,000,
(ii) $400 monthly lease payment over a 36-month period, and
(iii) purchase cost of $12,000 at the end of the lease.
What are the “implied” APR and EAR of the lease? Should you lease the car or buy and finance the car with a loan from the bank in (a)?