Question

Rob wants to purchase a $5,000 drum set. the music store offers him a two-year installment agreement requiring $800 down and monthly payments of $202.50. rob has a poor credit rating.

a. what is his interest on this installment agreement?
b. instead of using the store's installment plan, rob can borrow $5,000 at an apr of 7% from a local consumer finance company. what would be the monthly payment for this loan using the table from example 1? round to the nearest cent.
c. how much interest would the finance company charge?
d. should rob use the installment plan or borrow the money from the finance company?

Answer 1

a. The interest on the installment agreement is $140. b. The monthly payment for a loan with a 7% APR would be approximately $216.15. c. The finance company would charge approximately $187.60 in interest. d. Rob should use the installment plan offered by the music store.

Step-by-step explanation:

a. To calculate the interest on the installment agreement, we first need to determine the total amount paid over the two years. The monthly payment is $202.50, so the total amount paid is 24 monthly payments of $202.50, which equals $4,860. Therefore, the interest is $4,860 - $5,000 = $140.

b. Using the table from Example 1, we can find that the monthly payment for a $5,000 loan at a 7% APR over two years is approximately $216.15.

c. To calculate the interest charged by the finance company, we need to subtract the original loan amount of $5,000 from the total amount paid over the two years, which is $216.15 x 24 = $5,187.60. Therefore, the finance company would charge approximately $5,187.60 - $5,000 = $187.60 in interest.

d. Comparing the options, the interest charged by the finance company is higher than the interest on the installment agreement. Therefore, it would be more beneficial for Rob to use the installment plan offered by the music store.