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(Answered) Option A is a scheme where customers can pay for the bike in monthly instalments over three years, at a fixed APR of 18%: Briefly explain what APR is and how it can be used.

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Lokesh wants to buy a Vespa motorcycle to be able to get to work easily, as well as indulge in leisurely road trips. His local retailer sells the model he likes for £3000. However he doesnt have the money to pay upfront so is looking at different financing options.

        Option A is a scheme where customers can pay for the bike in monthly instalments over three years, at a fixed APR of 18%.

        Option B is for Lokesh to use a combination of savings and a credit card loan. This would use up all of his savings of £2000, currently in a savings account, and the credit card would pay for the remainder. The APR on his credit card is 26%. He would repay £25 monthly.

3.1  Briefly explain what APR is and how it can be used. (3 marks)

3.2  Using the Borrowing and saving calculator, calculate the missing figures in Table 2 below, and show your workings. (6 marks)

Table 2

 

Monthly payment

Repayment period

Total interest paid

Option A

 

 

 

Option B

 

 

 

3.3  Discuss one advantage and one disadvantage of Option A over Option B. (6 marks)

(Total marks available for Question 3: 15 marks)

Word limit for Part A: 800 words

 

Part B (45% of the mark for this assignment)

 

Read the two sentences below, from an analysis of trends in household debt published at the end of 2017.

Debt lets households smooth shocks and invest in high-return assets such as housing or education, raising average consumption over their lifetimes. However, high household debt can make the economy more vulnerable to disruptions, potentially harming growth.

(Zabai, 2017, p.39)

Write an essay that further explains all the statements made in these two sentences, and that makes clear why secured as well as unsecured debt contributes to the costs and benefits they identify.

(Total marks available for Part B: 45 marks)

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