Auto dealers have recently been offering “zero percent” financing. A typical plan offers
a potential auto buyer the alternative between choosing a zero percent loan and a rebate on the
Here’s the way a typical loan works: Josephine Autobuyer is interested in buying a
$20,000 car. The dealer offers Josephine two alternatives:
• She can pay the full manufacturer’s suggested retail price (MSRP) of $20,000 and get a
five-year loan at zero percent loan. There are 60 monthly payments on the loan of
= ; the loan’s first payment is at the time of the car purchase.
• Josephine can get a $3,000 rebate on the MSRP. In this case, however, she will have to
finance the car at the market interest rate. Current rates on 60-month car loans are 5.9%;
the monthly rate charged on such a loan is 5.9% 0.492%
= . A 60-month car loan rate
has payments in month 0 (the time of purchase), and months 1, 2, … , 59.
1. Analyze the two alternatives; which is preferred? Use the following template:
And also if you could explain this as you would put it in a calculator that would be so helpful.