John Dean is trying to buy a new Ford pickup and has been negotiating with two dealerships on identical trucks with sticker prices of $42,200. The first dealer is offering to finance the truck at 0 percent interest for the next 36 months. The second dealer has offered to sell John the truck for $36,000 and will finance the price with a bank loan over the next 36 months at a 12 percent annual rate of interest.

Which of the two deals is better for John if 12 percent is the going truck loan interest rate?

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Why would the first dealer be willing to loan money at 0 percent interest?

Jill Walters, your boss at Walters’s Waterbeds & Futons, has seen the zero percent interest advertising of other furniture stores and wants to use this promotion to attract new customers. Currently, her cost to buy a futon is $200 and she is selling them for $550. She is also charging 18 percent interest for customers who buy on credit. Jill wants to offer 24 months’ interest-free financing.

What price must she charge if she wants to maintain her current profit margin and still make 18 percent interest?

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