You’ve taken out a 4-year term loan with another bank for $100,000 at a 6% annual rate of interest.You must make a payment of $28,859 at the end of each of the next four years.In addition, the bank will charge you a monitoring fee of $250 per month (or $3,000 per year).What is the effective rate of interest on this loan?
Based on the information provided above, the sum of total payment and monitoring fee is as follows:
| Years | Yearly Payments | Monitoring Fee | ||
| Year 1 | $28,859 | $3,000 | ||
| Year 2 | $28,859 | $3,000 | ||
| Year 3 | $28,859 | $3,000 | ||
| Year 4 | $28,859 | $3,000 | ||
| Total |
|
|
||
| Grand Total | $115,436+
|
Total cost incured is $127,436 tll the end of four years.
Total additional cost is $27,436 and annual additional cost is $27,436 / 4 = $6,859.00. Hence, the effective insterest rate is $6,859 / $100000 = 6.86%
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