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Buy On Time or Pay Cash Cost of Borrowing 1. Terms of the loan a....

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Finance

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Buy On Time or Pay Cash Cost of Borrowing 1. Terms of the loan a. Amount of the loan $15,000,00 b. Length of the loan (in years) 3 c. Monthly payment $470.10 2. Total loan payments made ($ per month months) 3. Less: Principal amount of the loan 4. Total interest paid over life of loan 5. Tax considerations: - Is this a home equity loan? no - Do you itemize deductions on your federal tax return? yes 6. What federal tax bracket are you in? 10% 7. Taxes saved due to interest deductions ($ x \%) 8. Total after-tax interest cost on the loan Cost of Paying Cash 9. Annual interest earned on savings (3% 10. Annual after-tax interest eamings ($ %) 11. Total after-tax interest earnings over life of loan (5 x years) Net Cost of Borrowing 12. Difference in cost of borrowing versus cost of paying cash $ Based on the numbers alone, you should because: If you invest the principal, you'll earn more interest than you'll pay on the loan. The interest on a loan will cost you more than the interest you would earn if you invested the principal

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