Question
Winsome is considering borrowing $10,300 over seven years to buy a new compact SUV valued at $23,500 drive away. Winsome has been offered a trade-in
Winsome is considering borrowing $10,300 over seven years to buy a new compact SUV valued at $23,500 drive away. Winsome has been offered a trade-in value of $13,500 on her current vehicle. She believes that, with the lower registration, insurance, servicing, and fuel costs of a new, smaller vehicle, she will save approximately $675 a year on her vehicle operation expenses over each of the next 7 years. Winsome has been looking at the finance contracts available to her from alternative banks and credit unions. She has had the following annual interest rates and loan establishment fees quoted to her for a car loan (compounding and repayments are monthly): 7.35 per cent per annum, application and processing fee $150; 7.65 per cent per annum, application and processing fee $125; and 7.05 per cent per annum, application and processing fee $250.
As mortgage interest rates have fallen since the time that Winsome took out her current variable rate mortgage, she has been looking at alternative mortgage loans with which to refinance. To have a different mortgage size and term, Winsome wishes to borrow the $285,000 that she still owes on her apartment over 20 years. Winsome has had the following interest rates and loan establishment fees quoted to her (repayments will monthly): 2.95 per cent per annum compounded monthly, application and processing fee $350; 2.57% per annum compounded monthly, application and processing fee $750; and 2.45% per annum compounded monthly, application and processing fee $1,050. As the loan to value ratio on her property is low, at approximately 40 per cent, no mortgage insurance will be required.
With respect to the car loan and the new home loan being considered by Winsome in the next 2022-2023 financial year,
a. What would be the monthly and annual payments?
b. Which contract is the best loan that provides the more attractive (the lowest) effective interest rate?
c. Would the best loan evaluated improve the financial position if she decides to take it (i.e., does it provide a cash flow improving alternative to the existing loan or other net benefit)
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