Assume the car can be purchased for 0% down for 60 months (in lieu of rebate).

Question

A car with a sticker price of $42,500 with factory and dealer rebates of $5,100
(a) Find the monthly payment if financed for 60 months at 0% APR. (Round your answer to the nearest cent.)

(b) Find the monthly payment if financed at 2.5% add-on interest for 60 months. (Round your answer to the nearest cent.)

(c) Use the APR approximation formula to find the APR for part (b). (Round your answer to one decimal place.)

(d) State whether the 0% APR or the 2.5% add-on rate should be preferred.
0% APR
2.5% add-on rate

Answer 1

a) since 0% interest, the monthly payment would simply be
42500/60 = $708.33

b) I believe in the US , add-on-interest is done this way:
amount to be financed = 42500-5100 = 37400
interest = 37400(.025)(5) = 4675.00
total of loan = 37400 + 4675 = 42075.00
monthly payment = 42075/60 = 701.25

c) not familiar with the approximation formula used in the US (I am in Canada)

d) which method gave us the lower payment?

The method used in b) gives an effective rate of much higher than 2.5%, and would be often misunderstood by the consumer.
Done in the proper compound interest method :
i = .025/12 = .00208333...
n = 60

37400 = paym( 1 - 1.00208333..^-60)/.002083333..
payment = 663.75