Question

Robert is purchasing appliances worth $1300.00. His local store is offering two finance deals for first time costumers that open a credit card.

offer 1, 5% off daily from your total credit card bill with 26.99% apr.

offer 2, 0% apr for 18 months. anything after will have the 26.99% apr.

if robert makes payments of $100 monthly for both scenarios when will he pay his line of credit off? which offer will benefit him the most and why?

Answer 1

Answer:

Option 1:

Appliance cost = $1300

Financing required = 1300 * (1 - 5%) = $1235

Daily Interest rate = 26.99% / 365

Monthly effective interest = (1 + 26.99% / 365) ^(365/12) - 1 = 2.273801%

Monthly payment = $100

Number of months required to pay credit line = NPER (rate, pmt, pv, fv, type)

= NPER (2.273801%, 100, -1235, 0, 0)

= 14.66 months

if Robert makes payments of $100 monthly for option 1 he will pay his line of credit off in 14.66 months.

Option 2:

Term: 0% apr for 18 months. anything after will have the 26.99% apr.

Finance required = $1,300

If Robert makes payments of $100 monthly, he can pay off his credit line in (1300/ 100 = ) 13 months and no interest will be charged.

As such with monthly payment of $100:

Option 1 takes Robert 14.66 months to pay his credit line and option 2 takes him 13 months.

Option 2 will benefit him most.