Question

A car dealer offers you two deals on a car that costs $16,000. Please calculate the monthly payment, given these two payment options the car dealer is offering.

Payment Option 1: You can finance the car for 60 months with no interest if you make a $3,000 down payment.

Payment Option 2: You can finance the car for 72 months (6 years) with 1% simple annual interest and no down payment. (Hint: To calculate simple annual interest, use the formula Interest = Principal * Rate * Time (in years). Add the amount of interest to the price of the car.)

Which monthly payment amount is lower? Pleas

Answer 1

Option 1:
subtract down payment from balance
16000 -3000 = 13,000
60P = 13,000
--> P = 216.66

Option 2:
add the interest to balance
B = 16,000(1+.01(6)) = 16,960
72P = 16,960
--> P = 235.55

First option gives lower monthly payment as well as lower overall cost of buying car