needs to finance $30,000 for 72 months

Question

in spring 2010, some car dealers offered 2 deals on a new car: (1) a cash-back allowance of $500 of (2) 0% financing for 72 months.

Answer 1

What is your question?

 

Let's compare the two offers

 

1. 29,500 now compared to

 

$30,000 / 72 = $416.6667 per month for 72 months

 

We can ask, what is the implied interest rate if we assume that the present value of 72 monthly payments is equal to $29,300

 

Using a financial calculator we have

 

PV = 29,500

PMT = 416.6667

n = 72

FV = 0

i% = ?

 

The calculator yields .047492% per month or multiplied by 12 =

 

5.599 = 5.6% per year

 

If the current interest rate on car loans is higher than 5.6%, the second option is better. If the interest rate is lower than 5.6% the $500 discount is better.