Question

# When interest rates are low, some automobile dealers offer loans at 0% APR, as indicated in...

When interest rates are low, some automobile dealers offer loans at 0% APR, as indicated in a 2016 advertisement by a prominent car dealership, offering zero percent financing or cash back deals on some models.

Zero percent financing means the obvious thing—that no interest is being charged on the loan. So if we borrow \$1,200 at 0% interest and pay it off over 12 months, our monthly payment will be \$1,200/12 = \$100.

Suppose you are buying a new truck at a price of \$28,000. You plan to finance your purchase with a loan you will repay over two years. The dealer offers two options: either dealer financing with 0% interest, or a \$2,800 rebate on the purchase price. If you take the rebate, you will have to go to the local bank for a loan (of \$25,200) at an APR of 6.5%.

What would your monthly payment be if you took the rebate? (Round your answer to the nearest cent.)

\$

If we go for dealer financing we have to give = \$ 28000

So, each month we have to give = 28000/(2 * 12) = \$ 1166.67

Total we have paid = 1166.67 * 24 = \$ 28000

Now, if we go for rebate option

If the amount of repayment is calculated based on a simple interest method, the formula used will be -

I = P * R * T

Where:-

I = Interest

P = Principal amount of loan (\$25,200)

R = Rate of interest (6.5% APR)

T = Time period of loan (2 years)

Therefore, by substituting values the answer will be -

I = 25,200 * 6.5% * 2 = \$3276

Now, the amount that is to be repaid to the bank will be \$25,200 + \$3276 = \$28,476.

Since the period of repayment is 2 years i.e., 24 months, the amount of loan will be divided into 24 equal instalments.

\$28,476/24 = \$1186.5.625