Scenario: You are purchasing a new Lexus car. The cost is $88,850. You will make a 10% down payment. Your local bank's interest rate is 4%. You can borrow the balance either from your local bank using a four-year loan or from the dealership's finance company. If you purchase from your dealership's finance company, the APR will be 10% with your 10% down and monthly payments over three years. However, the dealership will give you a rebate of 5% of the car price after the three year term is complete. You want the best deal possible, so you consider the following questions:
What type of car have you selected, and what will it cost?
What is the interest rate from your local bank for a car loan for four years?
What will your payment be to your local bank, assuming your 10% down payment? (Be sure to use the formula and show your work).
How much will that car have cost in four years?
What will your payment be to the dealership finance company assuming your 10% down payment? (Be sure to use the formula and show your work).
How much will that car have cost in 3 years?
Which is the better deal and why?