7 A new engineering graduate who started a consulting business borrowed money fo

Question

7

A new engineering graduate who started a consulting business borrowed money for 1 year to furnish the office. The amount of the loan was $49,000, and it had an interest rate of 11% per year. However, because the new graduate had not built up a credit history, the bank made him buy loan-default insurance that costs $950. In addition, the bank charged a loan set-up fee of 1.1% of the loan principal What was the effective interest rate the engineer paid for the loan? The effective interest rate that the engineer paid for the loan was 96.

Explanation / Answer

Solution:-

Loan amount= $49000

Interest on the loan amount- 11% on $49000= $5390

Loan default insurance-$950

Loan set up fee- 1.1% of $49000= $539

So the total charges for the loan is-$5390+$950+$539=$6879

So the effective interest rate is 6879/49000*100= 14.04%

The engineer pays an effective interest rate of 14.04%.

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