You are headed to the mountains for some climbing this summer and you need some gear.The local mountaineering shop is offering 6% financing on all purchases before the end of the month.Your savings account is currently paying 5%,and you are in a marginal tax bracket of 28%.Which of the following is true?

Question

Quizplus · Accepted Answer

Taking the money out of savings (assuming you have enough funds) would be cheaper as the interest rate of 5% is lower than the 6% financing offered by the mountaineering shop. Additionally, if you borrow from the shop, you will have to pay back the borrowed amount with after-tax dollars, as your marginal tax bracket is 28%. Therefore, it is more cost-effective to take the money out of savings.

You Are Headed to the Mountains for Some Climbing This