Wize University Introduction to Finance Textbook > Time Value of Money
Contract vs Personal Rate
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Contract Rate and Personal Rate
Contract Rate
- Rate is the interest rate that the lender charges the borrower for the borrowed funds.
- This rate determines the amount of interest that will be paid and what the payments will be.
Personal Rate
- The borrower's personal rate determines the value of the payments to the borrower.
- This is often the rate that the borrower can borrow at using his or her existing credit cards, lines of credit, or existing loans.
Wize Concept
If the contract rate is less than the personal rate, then it is beneficial for the borrower to take the loan because it will save them money compared to what they would pay if they use their personal credit options.
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Example: Contract Rate and Personal Rate
Marc financed a new car from the dealership with an APR of 3% compounded monthly. The car costs $60,000 and will be repaid with monthly payments over 4 years. Marc's line of credit charges a rate of 9% APR compounded monthly. What is the value of the dealership's financing to Marc?
Mark Yourself Question
- Grab a piece of paper and try this problem yourself.
- When you're done, check the "I have answered this question" box below.
- View the solution and report whether you got it right or wrong.
Practice: Contract Rate and Personal Rate
You need new appliances for your house and the store's financing program is offering a rate of 6% compounded semi-annually. The appliances will cost a total of $5,000 and you plan to repay the appliances over 12 months with monthly payments. You still have a student credit card on which you have a special interest rate of 4.5% compounded monthly. What is the cost of accepting the store's financing program?