Question

Elmer received a $25,000 loan from a loan shark.  The loan required him to make payments of $400 per week (52 weeks per year) for three years.  What annual rate (APR) and effective annual rate (EAR) did the loan charge?

Answer 1

Sol:

Loan value (PV) = $25,000

Monthly payment (PMT) = $400 per week

Period (nper) = (52 weeks per year) for three years = 52 x 3 = 156

To compute annual rate (APR) and effective annual rate (EAR) the loan charge:

First we have to compute APR using RATE function in Excel. After computing APR we have to compute EAR.

EAR = (1 + weekly APR)^no of weeks in a year - 1

PV	-25000
PMT	400
nper	156
Weekly APR	1.4236%
Annual APR	74.03%
EAR	108.56%

Therefore annual rate (APR) will be 74.03% and effective annual rate (EAR) will be 108.56% charged for the loan.

Workings