This case is available in MyFinanceLab. Karou is considering different options f
ID: 2820308 • Letter: T
Question
This case is available in MyFinanceLab. Karou is considering different options for financing the $12,000 balance on her planned new car purchase. The cheapest advertised rate among the local banks is 7 percent for a 48-month car loan. The current rate on her revolving home equity line is 8.5 percent. Karou is in the 25 percent federal tax bracket and the 5.75 percent state tax bracket Calculate Karou's monthly car payment using your financial calculator. Compare the payment amount if she uses the 48-month car loan through her local bank versus her home equity line of credit. Assume both loans will amortize over 48 months and use the simple interest method.
I want it simple method
Explanation / Answer
use pmt formuale in financial calculator to find the monthly payments
7% ,48 months and 12000 balance it is
=pmt(rate,nper,pv,fv,type)
=pmt(7%/12,48,12000,0,0)
=287.35
8.5%,48 months and 12000 balance it is
=pmt(8.5%/12,48,12000,0,0)
=295.78
If we consider the after tax interest savings using equity loan it is
total interest payment =((295.78)*48)-120000=2197.42
After tax interest savings=2197.42*(1-(5.75%+25%))
=1521.71
if we consider local bamk it is
total interest payment =((287.35)*48)-120000=2197.42
After tax interest savings=2197.42*(1-(5.75%+25%))
=1793.04
the difference is 1793.04-1521.71=271.33
use home equity loan 8.5% as it is cheaper