Given that the price of the car in question is $ 28,700 and that a down payment of $ 2,400 has been made, the amount financed would be the overall cost (price of the car plus the sales tax) less the down payment:
Sales tax = 4.75% of price
= 4.75/100 x $ 28,700
= $ 1,363.25
Amount financed = $ 28,700 + $ 1,363.25 – $ 2,400
= $ 27,663.25
The installment price of the car would be the product of the monthly payments and the duration of the loan plus the down payment:
= 48 X $ 630
= $ 30,240
= $ 30, 240 + $ 2,400
= $ 32, 640
Finance charges to be paid over the life of the loan can be derived from the difference between the installment price of the car and its cash price:
= $ 32,640 – $ 28,700
= $ 3, 940
Paying cash has certain advantages over opting for a short term financing plan. For one, payment of cash results in lower costs of acquiring the asset in question while financing will lead to higher costs through the charges levied on the finance. On the other hand, the financing plan leads to better credit rating for the individual especially if such payment is prompt and regular. Lower interest rates would in effect lead to lower costs of financing assets in the short term as the installment price will only be slightly different from the cash price.
Good credit translates into a high credit worthiness score for an individual, essentially meaning that their likelihood of receiving loans is higher than one with a lower credit score. Good credit, as Emekter, Tu, Jirasakuldech, and Lu (2015) observed, basically indicates that one is likely to pay back loans promptly. The higher an individual’s credit score, the lower the rate of interest they will be charged on any given loan advanced to them.
- Emekter, R., Tu, Y., Jirasakuldech, B., & Lu, M. (2015). Evaluating credit risk and loan performance in online peer-to-peer (P2P) lending. Applied Economics, 47(1), 54-70.