Question

You are in the market for a new car. After test driving several models, you have decided to purchase the Tesla Model 3. Including all options and up-front costs, the car will cost you $70,000. You will sell your old hybrid car for $20,000, so you need to borrow $50,000 to purchase the car. As this is a long-term purchase, you will borrow the money for 5 years. You’ve identified the following four lenders:

Explain how you would rank the loans using solely financial criteria making sure you both explain the theory and provide the necessary computations. Then list at least two non-financial criteria you might use in selecting a lender, explaining why they are important. Finally, choose one of the four loans, explaining which criteria were most important to you.

1. loan - monthly payments are $943

2. IMB - monthly payments are $959.2

3. St George - monthly payments are $1041.59

4. Westpac - monthly payments are $1042.71

Answer 1

Solution:

Based on the limited data available from the example desctiption, I have computed the approx. interest rate charged for all the four loans as under.

LOAN	Loan A	IMB	St George	Westpac
Monthly Installment	943	959.2	1041.59	1042.71
Tenor in months	60	60	60	60
Approximate Interest Rate p.a.	4.98%	5.68%	9.15%	9.20%

Note: Goal Seek functionality of EXCEL using PMT function are used to calculate the Interest Rate.

As is pretty eveident from the monthly installments as well that Loan A has a lower interest rate of 4.98% p.a. and hence is most attractive loan.

Following are some of the non-financial factors you should consider while selecting a lender.

1] Experience and Credibility : The lender should have sufficient experience in this business and credible in terms he is expected to share all information to the borrower.

2] Flexibility of payments: Some lenders may offer payment flexibility incase you are not able to make one payment on due date. Such option is good for borrower.

3] Good documentation : The lender that provided clear and legal documentation is best suited.

For me, financial criteria takes the highest consideration. Hence Loan A is best.

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