Bella Wans is interested in buying a new motorcycle. She has decided to borrow money to pay the $25,000 purchase price of the bike. She is in the 25% federal income tax bracket. She can either borrow the money at an interest rate of 5% from the motorcycle dealer, or she could take out a second mortgage on her home. That mortgage would come with an interest rate of 6%. Interest payments on the mortgage would be tax deductible for Bella, but interest payments on the loan from the motorcycle dealer could not be deducted on Bellas federal tax return.

• a. Calculate the after-tax cost of borrowing from the motorcycle dealership.
• b. Calculate the after-tax cost of borrowing through a second mortgage on Bellas home.
• c. Which source of borrowing is less costly for Bella?
• d. Is there any other consideration that Bella ought to think about when deciding which loan to take out to pay for the motorcycle?