Ethics of Financing. Jane Outslay, a community activist, has just opened the first community development credit union
Question:
Ethics of Financing. Jane Outslay, a community activist, has just opened the first community development credit union in the Overton section of Metro City. Its goal is to provide credit to low-income persons living in Overton, the poorest area of Metro City. For several years, no financial institution has operated in this square-mile area. Jane has made many presentations to community groups and needs illustrations of how the credit union can help low-income people establish credit to buy furnishings, remodel homes, and buy autos. She has these facts:
Buying living room furniture: Sam's Rent-to-Own offers a low-quality living room set, table, lamps, and entertainment center for \(\$ 2,000\) cash or a monthly payment of \(\$ 75\) per month, with nothing down and 48 months to pay. The monthly payment includes simple interest of 18 percent for 48 months plus a small monthly service charge of \(\$ 3.33\), common terms in the area.
Somewhat better quality furniture at a reputable store some distance away would cost \(\$ 1,500\). Jane's credit union could provide credit to a working person for 48 months at a 9 percent interest rate. A 10 percent downpayment is required.
Buying a car: Joe's Deal and Drive will sell and finance a \(\$ 10,000\) new car. The monthly payment includes 15 percent simple interest on the \(\$ 10,000\) for four years, a required \(\$ 1,800\) per year insurance policy, a credit checking fee of \(\$ 500\), and a required \(\$ 5\) per month credit life policy.
Mike's Autos will lease the same car on a 24 -month lease with a 12 percent imbedded interest rate. The lease on the \(\$ 9,000\) car includes a residual value for the car of \(\$ 3,000\) at the end of the lease period. Insurance from an independent agent will cost \(\$ 100\) per month. A \(\$ 500\) up-front lease contract fee is required.
Jane's credit union will lend 90 percent of the car's cost of \(\$ 9,000\). A 48-month loan can be made at 9 percent. Insurance is again \(\$ 100\) per month.
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Prepare a comparative analysis for each situation for Jane to use in community talks. Highlight qualitative advantages and disadvantages of each financing choice in each situation.
Step by Step Answer:
Managerial Accounting
ISBN: 9780538842822
9th Edition
Authors: Harold M. Sollenberger, Arnold Schneider, Lane K. Anderson