Question

If you take out an $8000 car loan that calls for 48 monthly payments of $240 each, what is the APR of loan? What is the EAR on loan? please indicate steps, rather than excel or financial calculator solution

Answer 1

	The first step is to find the monthly interest rate.
	Using the formula for loan amortization, we have
	8000 = 240*PVIFA(r,48), where r = monthly interest rate.
	Solving for r,
	PVIFA(r,48) = 8000/240 = 33.3333
	Using annuity interest factor tables
	Interest factor for n = 48 and r = 1% = 37.9740
	for 2% = 30.6731
	So interest rate for factor 33.3333 = 1%+1%*(37.9740-33.3333)/(37.9740-30.6731) =	1.64%
	ANSWERS:
1)	APR = 1.64*12 =	19.63%
2)	EAR = 1.0164^12-1 =	21.49%