Question

You plan to buy a Honda car which currently costs $22,000. The car dealer offers the following two options: you can either borrow the entire amount at low interest rate of 1.99% per year compounded monthly for 36 months or get a cash rebate of $1,000 and borrow at 3.99% per year compounded monthly for 36 months. Which option is better for you?

Answer 1

Option1: Original Borrowing = $ 22000, Borrowing Tenure = 36 months, Interest Rate = 1.99% compounded monthly

Let the monthly repayments be $M

Applicable Monthly Rate = 1.99 / 12 = 0.16583 %

Therefore, 22000 = M x (1/0.0016583) x [1-{1/(1.0016583)^(36)}]

22000 = M x 34.1984

M = 22000 / 34.1984 = $ 630.04

Option 2: Cash Rebate = $ 1000, Borrowing = 22000 - 1000 = $ 21000, Interest Rate = 3.99 % per annum compounded monthly, Tenure = 36 months

Applicable Monthly Rate = 3.99 / 12 = 0.3325 %

Therefore, 21000 = N x (1/0.003325) x [1-{1/(1.003325)^(36)}]

21000 = N x 33.8759

N = 21000 / 33.8759 = $ 619.91

Total Payment under Option 1 = 630.04 x 36 = $ 22681.4 and Total Payment under Option 2 = 619.91 x 36 = $ 22316.8

As the borrower pays less under Option1, the same should be chosen.