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You are considering a car loan with a stated APR of 6.64% based on monthly compounding....

You are considering a car loan with a stated APR of 6.64% based on monthly compounding. What is the effective annual rate of this​ loan?

The effective annual rate is ___​%.

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Answer #1

Effective Annual Rate

Effective annual rate is the rate of interest an investor earns in a year after accounting for the effects of compounding.

It is calculated using the below formula:

EAR= (1+r/n)^n-1

Where r is the interest rate and n is the number of compounding periods in one year.

EAR= (1+0.0664/12)^12-1

        = 1.-1

        = 0.0685*100= 6.8459% 6.85%.

Therefore, the effective annual rate is 6.85%.

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