Discussion Case 1
Karou is considering different options for financing the $12,000 balance on her planned new car purchase. The cheapest advertised rate among the local banks is 7 percent for a 48-month car loan. The current rate on her revolving home equity line is 8.5 percent. Karou is in the 25 percent federal tax bracket and the 5.75 percent state tax bracket.
Questions
1. Calculate Karou's monthly car payment using your financial calculator. Compare the pay-ment amount if she uses the 48-month car loan through her local bank versus her home equity line of credit. Assume both loans will amortize over 48 months, and use the simple interest method.
2. What is Karou's income tax savings over the life of the loan if she chooses to use her home equity line of credit to finance the purchase of her new car?
3. Which loan offers the lower payment? Which loan has the lower after-tax cost? Use this information to determine which loan she should choose.
4. In a discussion with her father about financing her new car, Karou was surprised to hear that he once financed a car with the add-on method of interest calculation. He planned to repay the 52,000 loan within 1 year but was able to do so after 9 months because of a bonus he earned at work. The interest rate was 5 percent. Calculate the monthly payments, as well as the final payment to pay off the loan. How much interest was "saved; or rebated, using this method of financing and the rule of 78s?
5. Assume Karou's father could finance 52,000 today at 5 percent using the simple interest method of calculation. How much would the payments be? Calculate the final payment to pay off the loan after 9 months. How much interest was "saved"?
6. Considering the information in Questions 4 and 5, calculate the difference in finance charges, assuming neither loan was paid off early.
Discussion Case 2
Garth was amazed to hear that his friend Lindsey always pays off her credit card balance each month. Garth just assumed that everyone used credit cards the same way-buy now, pay later-only in his case, months later. He buys almost everything he needs or wants, including clothes, food, and entertainment, with his card. When Lindsey asked him about the balance cal¬culation method, APR, grace period, and other fees and features of his card, Garth was clueless. He reasoned that his credit card was a safe and convenient way to shop and that it allowed him to buy expensive items by paying minimum monthly payments. Overall Garth thought of him¬self as a responsible credit user, despite the fact that he had been late making a few monthly payments and, once or twice, had gone over his credit limit. He also uses his card regularly to obtain cash advances. After hearing all of this, Lindsey is worried about her friend. She has come to you for help in answering the following questions.
Questions
1. What type of credit user is Garth? Based on your answer, what is the number one factor that should influence Garth's choice of a credit card?
2. Lindsey insisted that Garth request a free credit report. List and briefly explain the informa-tion that Lindsey will need to help Garth decipher his report.
3. Nathaniel, another friend, suggested that Garth should obtain a secured credit card or, better yet, a Titanium card. Do you agree? Why or why not?
4. Based on what you know about Garth, what kind of additional fees and penalties is he most likely to encounter? What is the impact of these fees and penalties on Garth?
5. Explain the differences in credit card interest rates described as fixed, variable, teaser, and penalty rates. How do these different rates affect the cost of using a credit card?
6. What factors should Garth consider if he decides to transfer his current card balance to another card?