Michael Roddick a 27-year-old bachelor Jiving in Charlottesville 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 Herb Keller has offered to sell Michael his fully loaded Subaru Outback 3.6R. Herb wants $26,900 for his Outback, which has been driven only 8,000 miles and is in very good condition. Michael is eager to buy the vehicle but has only $10,000 in his savings account at Central Bank. He expects to net $8000 from the safe of his Chevrolet Malibu, but this will still leave him about $8900 short. He has two alternatives for obtaining the money:
a. Borrow $8,900 from the First National Bank of Charlottesville 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 a $8,900 installment loan requiring 36 monthly payments from the Charlottesville Teachers 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.
1. Determine the required monthly payments if the loan is taken out at First National Bank of Charlottesville.
2. Compute (a} the finance charges and (b) the APR on the loan offered by First National Bank of Charlottesville.
3. Determine the size of the monthly payment required on the loan from the Charlottesville Teachers Credit Union.
4. Compute a) the finance charges and b) the APR on the loan offered by the Charlottesville Teachers Credit Union.
5. Compare the two loans and recommend one of them to Michael. Explain your recommendation.