Question

Rusty Hull is a fisherman who has a fleet of boats that are used for his day-to-day fishing business. Rusty plans to add to the fleet a more powerful, larger boat for deep sea fishing expeditions. He has researched current market prices and found his preferred model will cost him around $75,000. He expects to finance the full amount. Before shopping around for finance, Rusty ensured he checked his credit score in the event he could negotiate a better deal with a prospective financier. Given his credit score is rated as being ‘Very Good’, the following three financiers have offered him the required amount under different terms and conditions:

Option 1 –CommBank offers the loan with $1,120.00 monthly repayments over 7 years with the payments occurring at the end of each month.

Option 2 – PackWest Bank offers the loan with repayments of $509.00 at the end of each fortnight over 7 years. In addition, this bank charges an upfront loan initiation fee of $750.

Option 3 – BNA Finance Solutions offers a no residual finance lease with repayments of $850 at the beginning of each month over 10 years with a loan establishment fee of $1,020 payable upon acceptance of the lease agreement.

As Rusty has become confused as to which finance alternative is best, given the different terms and conditions of each financier, he has sought your assistance and advice.

Answer 1

Please refer to the screenshot below for calculations:

Here we have used Rate function of Excel to calculate the periodic rates. Rate function on financial calculators can also be used with same inputs.

As the effective annual rate is lowest in case of option 2, so that is the best option.

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