Choosing between buying and a payment plan
A family needs a new washing machine. The retailer offers two options.\n\nOption 1 - Buy outright: $899, paid now.\n\nOption 2 - Interest-free payment plan: $150 deposit, then $95 per month for 8 months.\n\nThe family has $500 in savings earning 2% per annum, and could borrow the rest of Option 1 on a credit card at 19.9% per annum if they choose to buy outright and cannot cover the full amount. They also have a store loyalty voucher worth $40 that can be used on either option.
1. Calculate the total cost of each option after applying the $40 voucher, and determine which is cheaper in dollar terms.
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Option 1 (outright): 899 − 40 = $859 paid now.\n\nOption 2 (plan): deposit 150 + (8 × 95) = 150 + 760 = 910; less voucher 40 = $870.\n\nOption 1 is cheaper by 870 − 859 = $11.\n\nBut the difference is small, so the decision should also consider cash flow, not just the total.
2. The family has only $500 in savings. Compare the true cost of each option given their cash position, and recommend a choice with reasoning.
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Option 1 with borrowing: They have $500, so they need to borrow 859 − 500 = $359 on the credit card at 19.9% p.a. If repaid over, say, 6 months, interest ≈ 359 × 0.199 × (6/12) ≈ $36, making the effective cost about 859 + 36 = $895.\n\nOption 2: $870 total, spread over 8 months with no interest. The $150 deposit is affordable from savings, and $95 per month is manageable.\n\nRecommendation: Option 2 is the better judgement call. Although its sticker total is $11 higher, it avoids credit-card interest (about $36) and does not drain their savings. Option 1 only wins if they can pay the full $859 without borrowing - which their $500 savings do not allow.