Suppose I want buy a car. Also suppose the current inflation rate is 3% and it...
Suppose I want buy a car. Also suppose the current inflation rate is 3% and it is expected that due to the coronavirus, the inflation rate will double over the next 5 years. If the interest rate that is being offered for the car loan is 6%:
a. Would you recommend that I use borrowed funds to finance the car? What rationale do you have to justify your recommendation?
Homework Answers
I would recommend that it makes no difference whether you borrow or buy dirrectly.
Reason
The current inflation rate is 3% But, it will be double for the next 5 years, so it will be 6% from now on.
If I am getting a loan which is offering 6% interest that will totally offset the inflation rate.
Thus, I will be paying the same amount of inflation-adjusted money whethere I pay the money now or borrow it and make the payment slowly. Thus, it does not matter what I choose.
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