Quiz 5: Making Automobile and Housing Decisions Part Iii: Managing Credit

Business

Mrs. DS can afford to pay $450 per month after all her variable expense for a loan and $2000 as a down payment. Mrs. DS should go for a mid-size car newly arrived in the market costing about $20,000 , which includes an insurance of any accidental damage. And also provides a 3years of free servicing facility. And the most important part it will be under her budget. The following table G1 shows the financing details of the car: img In table G1 , the balance is calculated by subtracting the cost of the car form the down payment In table G1 , the total amount paid in instalment for 4 years is calculated by adding the interest of 4 percent for 4 years to the balance. In table G1 , the monthly installment for 4 years is calculated by dividing the total amount paid in installment by 48 months. Form the above calculations it can be concluded that Mrs.DS should go for dealers financing which will charge 4 percent interest for the 4 years. This will eradicate her total financing problem and with this offer she can save up to $15 per month as per her maximum monthly installment expense.

To buy a car costing $18000, Mr. DS has two alternatives to go for lease or purchase, the evaluation of lease and purchase is as follows: For Leasing: Total Cost of Leasing can be calculated by multiplying the monthly payments with lease time , which is as follows: img Therefore, from the above calculations it can be concluded that the lease will cost Mr. DS a total of img For Purchase: Total cost of purchase is calculated using the following equation, which is as follows: img Substitute $2,400 for ' Down payment ', $18,540 i.e. img for ' Monthly installment ', $1,080 for ' Sales tax ', and $6,500 for ' Residual value ' img From the above calculation, it can be concluded that the purchase will cost Mr.DS a total of img Therefore, from the above calculations, it is advisable to Mr.DS to purchase the car rather than leasing , because cost of purchase is less than cost of leasing.

The rent ratio of 8 indicates that it is more attractive to rent than to buy, whereas the rent ratio of 20 indicates that renting is expensive , it may still be better to buy. Hence, Cliff Arthur should make his choice accordingly.