How will the real interest rate affect the cost of your car, Ask an Expert

Economics

How will the real interest rate affect the cost of your car loan? Let’s assume that the old clunker you have been driving needs $500 in repairs in order to pass an annual car inspection. You are considering buying a new car, and you contact car dealers and banks to determine the best deal you can get on a car loan. Assume two different scenarios: (a) The lowest interest rate you find on a five-year car loan is 10 percent, and the annual rate of inflation for the next five years will be 9 percent. (b) The lowest interest rate you can find on a five-year car loan is 6 percent, and the annual rate of inflation for the next five years will be 1 percent.

Question: Under which scenario—(a) or (b)—will you pay less, in real income, for your car loan?

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Business Economics, Economics

Category:- Business Economics
Reference No.:- M92002359

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