Question

Find the APR (rounded to the nearest tenth of a percent) for the loan described below. Purchase a living room set for $3,200 at 10% add-on interest for 3 years.

Answer 1

Add-on interest method is combining the principal amount borrowed and the interest due together and then multiplying that figure by the number of years to repayment.

The total is then divided by the number of monthly payments to be made.

Here,

Value of living room set = $3200

Rate of add on interest = 10%

Time = 3years

The total interest to be paid in this add-on loan = 3200 x 10% x 3 = $960

The interest part of monthly installment = 960 / 3 x 12 = 960/36 = 80/3 = $26.67

The principal part of the loan = 3200/36 = $88.89

The total EMI to be paid = $26.67 + $88.89 = $115.56

To calculate APR, we will use the rate function of excel.

Here,

Total term of loan = 36 months (NPER)

Monthly installment = -$115.56 (PMT, negative sign is for cash outflow)

Loan amount = $3200 (PV)

Loan outstanding at end of loan tenure = 0 (FV)

Type = 0 (Payment at the end)

Therefore Rate = Rate(36,-115.56,3200,0,0) = 0.01493 = 1.493% (This is monthly rate)

Annual Percentage Rate (APR) = 1.493% x 12 = 17.92%