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Money Smarts
Chapter 4 Money Smarts: Long Term Means Higher Cost
Is time always on your side? Just as the
income on your savings can grow over time, the cost of your
debt can also increase with time. If you are borrowing money
for a purchase, you should shop around for the best “price”
of a loan. Generally the longer the loan term, the higher
the interest rate because of the increased risk from borrowers
not making payments on long-term loans. When you have small
down payments, long loan terms, and high interest rates, the
cost of your purchase rises substantially. Saving for the
purchase may be your best choice.
Go to the BusinessWeek Online
Personal
Finance Autos calculators. Under Auto Calculators, click
on “Which vehicle loan is better?”
Input the following values:
| |
Loan 1 |
Loan 2 |
| Down payment |
$2,000 |
$2,000 |
| Purchase price |
$20,000 |
$20,000 |
| Loan term (months) |
60 |
36 |
| Interest rate |
6.000% |
5.000% |
| |
|
|
| Your savings interest rate |
|
4.000% |
| Your state + federal tax rates |
|
21.8% |
Click on the “get your results”
button and answer the following questions.
- What is the total interest paid for Loan 1? For Loan 2?
What is the difference?
- According to the calculator RESULTS tab, what is the
difference between the cost of Loan 1 and Loan 2? Is this
difference the same amount that you calculated in Question
1? Why or why not? (HINT: Click on the HELP tab.)
- Click on the INPUTS tab and change the term for Loan
1 to 48 months. Which loan costs less? By how much?
- Change the interest rate on Loan 2 to 6 percent. The
loans now have the same interest rate, but they have different
terms (48 months versus 36 months). Which loan costs less
when you consider investment earnings? By how much? Which
loan will have less total interest paid? By how much?
- Why does the calculator ask for your income tax rate?
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