Interest and Loan Calculations

When taking loans to buy new assets for a business, one needs to carefully consider interest and interest rates. In the current case, a business owner would like to buy a used car for $23,500, $25,145 with the sales tax included. Since apparently, he or she cannot buy the car in cash, they take a loan. The entire finances charged can be found by multiplying the monthly payment by the number of months: $551.44 X 48 = 26,469. The total installment price is defined as the total amount of money that a person pays (Collis & Hussey, 2017). Hence, the installment price of the new car includes the down payment, hence, one needs to add the down payment to the previously calculated value: 26,469 + 1,200 = 27,669. Lastly, the amount financed is the actual amount of credit that is made available to a customer (Collis & Hussey, 2017). It equals the cash price including tax less the down payment: 25,145 – 1,200 = 23,945.

These figures will help a business owner understand whether the new investment is worth it.

Surely, the described situation is only one option of how a business owner can purchase a new car. There are certain advantages to paying cash instead of taking a loan. Firstly, paying cash is more straightforward: the buyer knows exactly how much he or she will pay. Understanding the entire installment price requires calculations that are often much more complicated than the ones described above. Taking a loan operates on the assumption that a person will have the needed amount of money available for the next N months. In real life, it is not always the case, especially given the market volatility. Drawing on the previous calculations, if a business owner pays cash, they will save $2,524, which is significant. They will be able to invest the money that would otherwise cover the interest in relevant business ventures.

On the other hand, paying the entire price right away is burdensome: it drains a buyer’s resources. As an alternative to paying cash and taking a two-year loan at a set interest rate, he or she might want to consider financing the vehicle over a shorter period of time, as well as, finding lower interest rates. For instance, if a business owner decides to take a loan for one year, they will pay significantly less in interest, let alone if they take a loan for six months. Finding a lower interest rate might also be advantageous and translate into lower expenses.

Having a good credit score is critical to qualifying for a loan. A credit score ranges from 350 to 800 and reflects a consumer’s creditworthiness. A credit score is a powerful number that affects a person’s major life decisions such as starting and sustaining a business. Many factors influence a person’s credit score: for example, payment history is extremely important as even one missed payment can hurt a person’s reputation. With a credit score lower than 620, it is fairly difficult to qualify for a low-interest rate. Therefore, a business owner should keep his or her score high to spare money on interest in the future. As of now, my current credit score suggests my trustworthiness and will not serve as an impediment to my future business ventures.

Reference

Collis, J., & Hussey, R. (2017). Cost and management accounting. Macmillan International Higher Education.

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