Question

A furniture company is offering a choice of deals. You can receive $500 cash back on the purchase, or a 3 percent APR, 2-year loan. The price of the dining room set is $5,000 and you could obtain a 2-year loan from your credit union at 4 percent APR. What is the cost per month of each deal?

Answer 1

1.

Interest Rate = 3%

Loan Amount = $5000

Tenure = 2 years

Number of Periods = 12

Using Annuity formula

EMI = (5000*(0.03/12)*(1+(0.03/12))²⁴)/((1+(0.03/12))²⁴-1)

EMI = $214.90

2.

Interest Rate = 4%

Loan Amount = $5000

Discount gained = $500

Effective Amount = $4500

Tenure = 2 years

Number of Periods = 12

Using Annuity formula

EMI = (4500*(0.04/12)*(1+(0.04/12))²⁴)/((1+(0.04/12))²⁴-1)

EMI = $195.41

Therefore the second option is best , take loan @4% and discount of $500