Barry and Steve are good friends. Barry wants to buy a new computer, but he doesn't have the money for it.....

Question

Hello. Please consider the folowing scenario:

Barry and Steve are good friends. Barry wants to buy a new computer, but he doesn't have the money for it right now. Barry says that he will pay Steve $2,000 in five years if Steve gives him $1,600 for the computer today.
Steve figures that there's an interest rate of 6% if he were to put the money in a bank instead of lending it to Barry.
Assuming that there is no risk of Barry not paying the $2,000 when he says he will, should Steve go through with the loan or should he put his money in the bank? Please explain your answer please, with examples.

Thank you. You guys gave great suggestions :-)

Answer 1

If Steve has to figure this out they are really not very good friends.

5 years compounded annually at 6%, $1600 = $2,141 and change. So he would be $141 ahead at the end of 60 months providing everything went as you say. Is $141 worth a friendship?

Answer 2

The surest way to destroy a friendship is to borrow from or lend to a friend.

Suggest to Barry that he get a loan from a financial institution, put your money in the bank - and remain friends. :)

Answer 3

if its going to be the same interest rate as a bank just get the money from the bank....they wont stay friends if money changes hands