A popular sales tactic among car dealers is to offer below-market interest rates to finance customers car purchases. Oftentimes these promotions are offered in conjunction with the choice of a rebate. Suppose you are preparing to purchase a car that has a price of $20,000. The car dealer will provide financing at a 3% rate (3%/12=.0025 is the monthly rate) or the dealership will give you a $2,000 rebate if you provide your own financing. You can get financing from the bank for 6% (.005 monthly rate). The term of both loans is 3 years with monthly payments that begin one month after you buy the car.

a) What are the payments you would make at 3%? 581.62

b) What is the present value of those payments at the true rate of interest the rate you could get from the bank? 17375.71

c) What would your payments be if you obtained your own financing and financed the car price net of the rebate? 547.59

d) Which is the better deal (rebate or below-market interest rate)? below-market interest rate