Question

A local finance company quotes a 14 percent interest rate on one-year loans. So, if you borrow $20,000, the interest for the year will be $2,800. Because you must repay a total of $22,800 in one year, the finance company requires you to pay $22,800/12, or $1,900.00, per month over the next 12 months.

   

a.	What rate would legally have to be quoted?

  

b.	What is the effective annual rate?

Marisol is looking at a one-year loan of $15,000. The interest rate is quoted as 10 percent plus 4 points. A point on a loan is simply 1 percent (one percentage point) of the loan amount. Quotes similar to this one are common with home mortgages. The interest rate quotation in this example requires the borrower to pay 4 points to the lender up front and repay the loan later with 10 percent interest.

  

What rate would Marisol actually be paying here?

Multiple Choice

• 5.60%

• 14.58%

• 16.04%

• 13.12%

• 10.00%

Answer 1

1)

a)

APR is legally quoted. So, Legally required APR is 14%

b)

Effective annual rate is 27.96% [(1+2.076%)^12-1]