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Grant Gets His Outback

Grant Tyson, a 27-year-old living in Arlington, Virginia, has been a high-school teacher for five years. For the past four months, he’s been thinking about buying a Subaru Outback, but he feels that he can’t afford a brand-new one. Recently, however, his friend Martin Grubbs has offered to sell Grant his fully loaded Subaru Outback 3.6R. Martin wants $26,900 for his Outback, which has been driven only 8,000 miles and is in very good condition. Grant is eager to buy the vehicle but has only $10,000 in his savings account at Central Bank. He expects to net $8,000 from the sale of his Chevrolet Malibu, but this will still leave him about $8,900 short. He has two alternatives for obtaining the money:

a. Borrow 8,900 from the First National Bank of Arlington at a fixed rate of 6 percent per annum, simple interest. The loan would be repaid in equal monthly installments over a three-year (36-month) period.

b. Obtain an 8,900 installment loan requiring 36 monthly payments from the Arlington Teacher’s Credit Union at a 4.5 percent stated rate of interest. The add-on method would be used to calculate the finance charges on this loan.

Critical Thinking Questions

1. Using Exhibit 7.6 or a financial calculator, determine the required monthly payments if the loan is taken out at First National Bank of Arlington.

2. Compute (a) the finance charges and (b) the APR on the loan offered by First National Bank of Arlington.

3. Determine the size of the monthly payment required on the loan from the Arlington Teacher’s Credit Union.

4. Compute (a) the finance charges and (b) the APR on the loan offered by the Arlington Teacher’s Credit Union.

5. Compare the two loans and recommend one of them to Grant. Explain your recommendation.


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