Donald is in the market for a used car. He has found the same sports car...

Donald is in the market for a used car. He has found the same sports car at two different dealerships and is now considering which dealer he should purchase the car from. Dealer 1 requires Donald to get the loan through their lending department. Dealer 1 has told Donald that because they do their own financing, they can get Donald the very best loan possible and Donaldwill only have to pay $365 per month for 60 months (5 years). Dealer 2 is selling the car for $18000. Dealer 2 has told Donaldhe can use their financing or get his own lender, so Donald talked with his bank and learned that he can get a 5 year car loan for 4.1% APR. Dealer 2 has also offered Donald a 5 year loan for 5.1%. Based on these loan options, what is Donald’s lowest monthly loan payment option?

$365 per month for 60 months from Dealer 1.

$340.51 per month for 60 months from Dealer 2.

$332.31 per month for 60 months from Donald’s bank.

There is not enough information to determine which loan option will have the lowest monthly payment.

Solutions

Expert Solution

Monthly payment to Dealer 1 = $365

Bank = Amount of Loan/PVAF(r%, x periods)

= 18,000/PVAF(0.34167%, 60 periods)

= $332.31

Since the rate charged by Dealer 2 is higher, monthly payment will be higher

Hence, Donald’s lowest monthly loan payment option is

$332.31 per month for 60 months from Donald’s bank.

jeff jeffy answered 2 years ago

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