Question

You want to buy a new pickup for $42,854, and the finance office at the dealership has quoted you an 8.4% APR loan for 6 years of monthly payments. What is the effective annual rate on this loan? (Do not include the percent sign (%). Enter rounded answer as directed, but do not use the rounded numbers in intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

Answer 1

Effective Annual Rate (EAR)

Effective Annual Rate (EAR) is calculated by using the following formula

Effective Annual Interest Rate = [1 + (r/ n)] ⁿ − 1

Where, Annual Interest Rate (r) = 8.40%

Number of compounding (n) = 12 Months

Effective Annual Rat Interest Rate (EAR) = [1 + (r/ n)] ⁿ − 1

= [1 + (0.007 / 12)]¹² – 1

= [1.007] ¹² – 1

= 1.0873106 – 1

= 0.0873106

= 8.73% (Rounded to 2 decimal places)

“Hence, the Effective Annual Rat Interest Rate (EAR) on this loan would be 8.73%”