OPPapers.com

Compare Cash Price For A Purchase Of A Large Ticket Item Vs A Monthly Payment Plan.

Option #1 a) Compare cash price for a purchase of a large ticket item vs a monthly payment plan.

The large ticket item I would be purchasing is an engagement ring from the Tiffany store on Bloor street. The ring would be one carat and it would cost $13,000. Payment options are paying cash or paying with AMEX card in which the interest would be 16.9%, which would require minimum monthly payments of approximately $390. The other option would be to get a fixed loan with an interest rate of 8% with the bank.

It is very obvious that paying cash for a large ticket item is the best option available, when cash flow allows it. Monthly payment plans almost always involve incurring interest, which ultimately makes the item initially purchased to be much more that the original price in the end. For example a single purchase made can cost you more than twice the original price you paid if you only make minimum payments on your credit card.

Credit Card scenario:

Principle Balance Owing: $13000
Annual Credit card interest rate: 16.9%
Minimum Payment Percentage: 2%
Number of months making payments: 637
Number of years to pay balance: 53
Interest paid over 53 years: $30,124.43
Principle Paid: $13000

In this case if I only made minimum payments I would end up paying almost 3 times what the ring cost!

Principle Balance Owing: $13000
Annual Credit card interest rate: 16.9%
Set monthly payments: $500
Number of months making payments: 33
Number of years to pay balance: 3
Interest paid over 3 years: $3,302.82
Principle Paid: $13,000

In this case by making set payments more than the minimum required, I would be paying only $3,302.82 in interest over 3 years.

Fixed Loan scenario:

Loan Amount: $13,000
Annual Interest Rate: 8%
Term of Loan: 2 years/24 months
Monthly Payment: $588.08
Total Borrowing Cost: $1113.92

Loan Amount: $13,000
Annual Interest Rate: 8%
Term of Loan: 5 years/60 months
Monthly Payment: $263.65
Total Borrowing Cost:...