Question

Tom is in dire need of a new washing machine. He knows what model he would like to get, but doesn't have the cash to pay for it. He plans to get a line of credit (credit card) at the store when he purchases his new washer. He found four different stores that carry the same washing machine for different prices. The lines of credit they offer also come with different APRs. Tom's primary goal is to minimize his monthly payment as he pays the washing machine off over the next 18 months. From which of the four stores should Tom purchase his washing machine?



Store
Price ($)
Credit Card APR
Bob's Nuts and Bolts
$450.00
21%
Steve's Scratch and Dent
$405.00
22%
Wally's Washing Machines
$432.00
19%
Al's Appliances
$475.00
16%

a.
Bob's Nuts and Bolts
b.
Steve's Scratch and Dent
c.
Wally's Washing Machines
d.
Al's Appliances

Answer 1

Use the loan amortization formula: payment = P * r / (1 - (1+r)^-n), where r = APR/12 and n = 18 months.

Calculations (rounded):
- Bob's (P=$450, APR=21% → r=0.0175): payment ≈ $29.33/month
- Steve's (P=$405, APR=22% → r≈0.018333): payment ≈ $26.58/month
- Wally's (P=$432, APR=19% → r≈0.015833): payment ≈ $27.67/month
- Al's (P=$475, APR=16% → r≈0.013333): payment ≈ $29.85/month

Minimum monthly payment is at Steve's Scratch and Dent.

Answer: b. Steve's Scratch and Dent