Question

1. Furniture to Go is offering new customers an opportunity to defer their furniture purchase payments for 3 months before their first payment is due. You purchased furniture costing $8,000 and want to take advantage of the 3 months’ deferral before making your first payment. You agree to pay the loan in monthly payments over a 3-year period after the deferral period. If the interest rate is 12% per year and interest accrue monthly during the 3 months’ deferral period.
   1. Draw the cash flow diagram from your perspective.
   2. How much are your monthly payments?
   3. How much interest will you pay over the life of your loan? (you make all scheduled payments)
   4. You decide to pay off your car loan when you make your 24^th payment. What will be the payoff for the loan?
   5. How much interest did you save by paying the loan off in 24 months versus keeping the loan for the original term?
      

Answer 1

Cost of furniture = $ 8,000

Rate of interest = 12% per annum

Time = 3 yrs

Hence, total interest paid = $ 8,000 × 3 × 12/100

= $ 2880

Total amount paid during the loan = $ ( 2800 + 8000 )

= $ 10880

But furniture to go is offering new customers an opportunity to defer their furniture purchase payment for 3 months before their first payment is due. Hence, total month = 39

(b) Let us assume monthly payment = x

ATQ 39x = $10880 ==> x = $ 278.97 ~ $279

(c) a total $ 2880 interest should be paid over a period of life of loan

(e) If the loan is paid in 24 month then total interest should be paid over the period = $ 1920

Hence, there will be a save of $ 960.