The following is an actual promotional pamphlet prepared by Trust Company Bank in Atlanta, Georgia: Lower your
Question:
"Lower your monthly car payments as much as 48%." Now you can buy the car you want and keep the monthly payments as much as 48% lower than they would be if you financed with a conventional auto loan. Trust Company's Alternative Auto Loan (AAL)SM makes the difference. It combines the lower monthly payment advantages of leasing with tax and ownership of a conventional loan. And if you have your monthly payment deducted automatically from your Trust Company checking account, you will save 1/2% on your loan interest rate. Your monthly payments can be spread over 24, 36, or 48 months.
The amount of the final payment will be based on the residual value of the car at the end of the loan. Your monthly payments are kept low because you make principal payments on only a portion of the loan and not on the residual value of the car. Interest is computed on the full amount of the loan. At the end of the loan period you may choose from these options.
1. Make the final payment and keep the car.
2. Sell the car yourself, repay the note (remaining balance), and keep any profit you make.
3. Refinance the car.
4. Return the car to Trust Company in good working condition and pay only a return fee.
So, if you've been wanting a special car, but not the high monthly payments that could go with it, consider the Alternative Auto Loan. For details, ask at any Trust Company branch.
* The chart on the next page is based on the following assumptions. Conventional auto loan 13.4% annual percentage rate. Alternative Auto Loan 13.4% annual percentage rate.
* The residual value is assumed to be 50% of sticker price for 24 months and 45% for 36 months. The amount financed is 80% of sticker price.
* Monthly payments are based on principal payments equal to the depreciation amount on the car and interest in the amount of the loan.
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* The residual value of the automobile is determined by a published residual value guide in effect at the time your Trust Company Banks Alternative Auto Loan is originated.
* The minimum loan amount is $10,000 (Trust Company will lend up to 80% of the sticker price). Annual household income requirement is $50,000.
* Trust Company reserves the right of final approval based on customer's credit history. Offer may vary at other Trust Company Banks in Georgia.
(a) Show how the monthly payments were computed for the Alternative Auto Loan by the bank.
(b) Suppose that you have decided to finance a new car for 36 months from Trust Company Bank. Suppose also that you are interested in owning the car (not leasing it). If you decided to go with the Alternative Auto Loan, you would make the final payment and keep the car at the end of 36 months. Assume that your opportunity cost rate (personal interest rate) is an interest rate of 8% compounded monthly. (You may view this opportunity cost rate as an interest rate at which you can invest your money in some financial instrument, such as a savings account.) Compare Trust Company Bank's alternative option with the conventional option and make a choice between them.
Opportunity cost is the profit lost when one alternative is selected over another. The Opportunity Cost refers to the expected returns from the second best alternative use of resources that are foregone due to the scarcity of resources such as land,...
Step by Step Answer:
To explain how Trust Company came up with the monthly payment sc...View the full answer
