A couple wants to buy $3,000 worth of furniture. They have three options for buying the furniture. Money used for down payments or monthly payments would have earned 4% annual interest compounded quarterly.
Which of the three options is "best"? Notice that each option has a present worth of $3,000. However, because of the different payment scenarios, the future worth of each may be different.
The first option is put 20% down, and obtain a 5-yr (monthly payment) personal loan from their bank at 14% yearly interest (compounded monthly) for the remainder.
The second option is to put down a 1/3 payment at the time of purchase and no payments required for six months. If you pay it off within the six months, no interest payments, otherwise the accrued interest is tacked on to the unpaid balance. Thereafter, the amount is paid off in 54 equal monthly payments. The interest rate is 19.6% (compounded monthly).
The third option is to use their Discover Card with a 13.9% interest (compounded daily) payable over five years.