Which is Better: A Rebate or a Low Introductory Interest Rate?

Automobile manufacturers and dealers use a variety of marketing devices to sell cars. Among these are rebates and low-cost dealer-arranged financing packages.

To determine which method of reducing the vehicles cost is better, you can use the following equation that considers the amount borrowed (D), the interest rate on the loan (APR), the number of payments made each year (Y), the total number of scheduled payments (P), and any finance charged in the transaction (F):

APRAPR

= =

Y (95P+9) F12P (P+1) (4D+F)Y 95P+9 F12P P+1 4D+F

You and your friend, Addison, have been shopping for your new car for several weeks. Together, youve visited several dealerships and your combined negotiating efforts have resulted in an agreed-on price of $27,690. In addition, the dealer has offered you either a rebate of 1,500 or an introductory interest rate of 2.0% APR.

If you elect to take advantage of the 2.0% low-cost dealer financing, youll also have to pay $1,038 in finance charges and make monthly payments of $600.74 for four years. Alternatively, youve also been preapproved for a four-year 5.0% loan from your credit union. This loan will require payments of $603.14 per month and a 2% down payment.

Given this information, what is the adjusted cost of the dealer financing package, rounded to two decimal places?

4.00%

4.60%

3.60%

Should you accept the low-cost dealer-arranged financing package or should you accept the rebate and finance your new vehicle using your credit union loan?

Select the loan offered by the dealer as it has a lower adjusted cost than the loan offered by your credit union.

Select the loan offered by your credit union as its cost is less than the adjusted cost of the dealer-arranged financing.