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A new homeowner is purchasing a living room set for $2,975 and must decide between two financing offers.

Offer 1: $250 down payment, 24.90% interest rate, compounded monthly, for 3 years, with no payments due for 6 months and then fixed payments of $139.05 for the remainder of the loan term

Offer 2: $400 down payment, 22.90% interest rate, compounded monthly, for 3 years, with no payments due for 12 months and then fixed payments of $165.76 for the remainder of the loan term

Part A: What is the total cost of offer 1? Explain which technology you used to solve and each step of your process.

Part B: What is the total cost of offer 2? Explain which technology you used to solve and each step of your process.

Part C: Which financing offer should the new homeowner choose? Explain your reasoning.

2 answers

Part A: The total cost of offer 1 is $4,845.25. I used an online loan calculator to solve this problem. I entered the loan amount ($2,975), the interest rate (24.90%), the loan term (3 years), and the number of payments (30). I then clicked "Calculate" to get the total cost of the loan.

Part B: The total cost of offer 2 is $4,717.60. I used the same online loan calculator as in Part A. I entered the loan amount ($2,975), the interest rate (22.90%), the loan term (3 years), and the number of payments (36). I then clicked "Calculate" to get the total cost of the loan.

Part C: The new homeowner should choose offer 2. Offer 2 has a lower interest rate and a longer period of no payments due, which will result in a lower total cost.
Part A: Total cost for offer 1 is $3895.25 + $250 down payment = $4,145.25

Results:
Payment Every Month   $108.20
Total of 36 Payments   $3,895.25
Total Interest   $1,170.25

Part B:  Total Cost for offer 2 = $3954.79 + $400 down payment = $4,354.79

Results:
Payment Every Month   $82.39
Total of 48 Payments   $3,954.79
Total Interest   $1,379.79

Part C:  the homeowner should choose offer 1 because the monthly payment is higher but the total overall is less.