Karen and Wayne need to buy a refrigerator because theirs just broke. Unfortunately, their savings account is depleted, and they will need to borrow money to buy a new one. The bank offers them a personal loan at 21% (APR), and BigBox offers them an installment loan at 18% (add-on-rate). Suppose that the refrigerator at BigBox costs $1,650 plus 7% sales tax, and Karen and Wayne plan to pay for the refrigerator for 4 years. Should they finance it with the bank or with BigBox? Why?
A) BigBox because BigBox's APR of 21.0% is less than the bank's APR of 35.3%.
B) the bank because the bank's add-on rate of 35.3% is less than BigBox's APR.
C) BigBox because BigBox's APR of 17.6% is less than the bank's APR of 21.0%.
D) the bank because the bank's APR of 21.0% is less than BigBox's APR of 35.3%.
E) BigBox because BigBox's add-on rate is less than the bank's APR of 21.0%.

Question

Quizplus · Accepted Answer

The bank's APR of 21.0% is less than BigBox's effective APR, which is higher due to the add-on rate method. The add-on rate of 18% results in a higher effective interest rate when converted to APR, making the bank loan cheaper.

Karen and Wayne Need to Buy a Refrigerator Because Theirs