You wish to buy a car worth $20,000. You have the money in your savings account....

You wish to buy a car worth $20,000. You have the money in your savings account. Should you go ahead and pay cash for the car (out of your savings account) or should you get a car loan from the dealer or from your bank to pay for the car? How do your expectations about interest rates have an impact on your decision? Please give an explanation.

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Expert Solution

Answer - The expectations about the interest rate deeply affect the decision making. If the interest rates for the loans are likely to be lower than the rate of interest in saving accounts , it will be better to take the car on loan. This is because the oportunity cost will be less and more interest will be gained on saving deposits than that which will be lost due to payment of interest. If the interest rates for the loans are likely to be higher , the prudence will be in buying the car from the saving deposits in order to sacrifice less , i.e do not pay the more interest loans on loans , rather sacrifice the lesser interest rate on savings.

Rahul Sunny answered 1 year ago

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