Sally has set aside about $7500 for a down payment, and she has budgeted for a monthly payment of $900. She expects that her salary will increase about 5% per year in real terms,but she would like to use that increase for “fun” purposes. Until last year, she was still paying off her student loans, and she has not been able to live in the style to which she would like to become accustomed. She has identified three financing possibilities, but she must compare their effective annual interest rates and other differences to determine which is best.

Sally is also wondering whether she is better off using some of her “extra” savings to reduce the loan by increasing her down payment, or whether she should use it on early payments.

Could you show an example?