2) Pete has negotiated a price for a new car at $25,000 on a model that carries a choice of a $2000 rebate or financing at 2% APR from the dealer. The dealer loan would require a $1000 down payment and a monthly payment of $525 a month for 60 months. Pete had arranged for a loan from his bank at 5% APR. Use the run the numbers worksheet on page 240 to advise Pete about whether he should take the rebate, use the dealer financing, or use the financing from his bank. This problem you should take into consideration the $2000 rebate, the dealer financing and the bank financing. vididyement RUN THE NUMBERS Dealer Financing or Rebate? you can receive a $3,000 rebate if you arrange your own Advertisements for new vehicles often offer low APRs for financing. The price of the car before the rebate is $32,000. dealer-arranged loans. A cash rebate of $1,000 to $3,000 Assume you can make a $4,000 down payment and that (or more) off the price of the car may be offered as an you can get a 7 percent loan on your own ther native to the low interest rate. If you intend to pay cash. This worksheet can be found on the Garman/ then the cash rebate obviously represents the better deal Forgue companion website, or you can find But which alternative is better when you can arrange your similar worksheet at www.bankrate.com/ own financing? calculators/auto/car-rebates-calculator.aspx The lower of the values obtained in steps 3 and 4 is the To compare the two APRs accurately, you must add the opportunity cost of the forgone rebate to the finance charge better deal. In this instance, the financing that you arranged of the dealer financing. The worksheet provides an example on your own is more attractive. In fact , any loan you of this process. Suppose a dealer offers 2.9 percent financing arrange that carries an APR lower than 12 percent compares for three years with a $1,269 finance charge. Alternatively, favorably with the dealer-arranged financing in this case. DO IT IN CLASS Your Figures Example $3,000 +$1,269 Step 1. Determine the dollar amount of the rebate. 2. Add the rebate amount to the finance charge for the dealer financing (dollar cost of credit) 3. Use the formula from Chapter 7 (Equation (7.2) on page 221 and used here as Equation (8.1)) to calculate an adjusted APR for the dealer financing Y(95P+9)F APR = (8.1) 12P(P + 1)(4D+) Where APR = Annual percentage rate Y = Number of payment periods in one year F = Finance charge in dollars D = Debt (amount borrowed) P = total number of scheduled payments (12)(95 X 36) +9]($3,000+ $1,269) APR = 12 X 36(36 + 1/[(4 X $28,000) + ($3,000+ $1.269)] 4. Write in the APR that you arranged on your own. 9.45% 7%