A local finance company quotes an interest rate of 15.2 percent on one-year loan

Question

A local finance company quotes an interest rate of 15.2 percent on one-year loans. So, if you borrow $38,000, the interest for the year will be $5,776. Because you must repay a total of $43,776 in one year, the finance company requires you to pay $43,776/12, or $3,648.00 per month over the next 12 months.

(Do not include the percent signs (%). Round your answers to 2 decimal places. (e.g., 32.16)) Is this a 16 percent loan? A. yes? B. no? What rate would legally have to be quoted ??? percent. What is the effective annual rate ???percent.

Explanation / Answer

a)No interest rate is not 15.2%.

b)To find the APR and EAR, we need to use the actual cash flows of the loan. In other words, the interest rate quoted in the problem is only relevant to determine the total interest under the terms given. The interest rate for the cash flows of the loan is:

=>PVA = $38,000 = $3648{(1

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