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Credit - Head Matters


1. Benefits and Costs

d. Calculate the Costs and Benefits of Borrowing to Buy, Given a Scenario Including Purchase Prices and Credit Terms.

The following example about Sam and her washer and dryer will give you a more detailed explanation of the total costs of borrowing and the possible benefits of “borrowing to buy.”

Sam’s Washer and Dryer

Sam needed a new washer and dryer in the worst way. She was spending time she didn’t have going to the Laundromat. There just weren’t enough hours in the day. Between going to school, getting dinner on the table, taking care of 3-year-old Charlie, getting him to childcare, and working part-time, she was worn out. She needed some relief. She estimated that she would save two hours a week with a washer and dryer.

Sam researched prices on the Internet to get an idea of what she’d be paying. She found out that both would cost about $1,100. She added another $100 for tax for a total price of $1,200. Since she took home about $12 per hour, this would be about 100 extra hours at her part-time job. She was depressed. Even if she were allowed to work the extra 100 hours, did she have the extra time to do so? Not really. So what were her other options?

Option 1: She could “borrow to buy” a new washer and dryer.
Borrowing money to buy them would add an interest expense to the total cost, but appliance dealers lend at low interest rates since the appliances themselves can be considered collateral. (Collateral is something of value the lender can take back if the loan is not paid.) With collateral backing the loan, it would be considered a secured loan. Also, she realized that she was spending money for the Laundromat and gas to get there. She estimated she spends $5 per week or $20 per month that could be used to offset the cost if she bought a washer and dryer.

Option 2: She could buy a used washer and dryer. She checked the classified ads and found that she could buy a used washer and dryer for about $350. While a bit leery of repairs, she decided she would have to factor in repair costs (with a repair fund) if she chose that option. Also, she would have to use a credit card with a higher interest rate, but, again, she would save $20 per month Laundromat costs.

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