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%
1)
a)
APR is legally quoted. So, Legally required APR is 14%
b)
Effective annual rate is 27.96% [(1+2.076%)^12-1]
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