A local finance company quotes an interest rate of 18.7 percent on one-year loan

Question

A local finance company quotes an interest rate of 18.7 percent on one-year loans. So, if you borrow $42,000, the interest for the year will be $7,854. Because you must repay a total of $49,854 in one year, the finance company requires you to pay $49,854/12, or $4,154.50 per month over the next 12 months.

What rate would legally have to be quoted? (Round your answer as directed, but do not use rounded numbers in intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)

What is the effective annual rate? (Round your answer as directed, but do not use rounded numbers in intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)

Explanation / Answer

What rate would legally have to be quoted? (Round your answer as directed, but do not use rounded numbers in intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)

Rate = rate(nper,pmt,pv,fv)*12

Rate = rate(12,4154.50,-42000,0)*12

Rate = 32.90%

What is the effective annual rate? (Round your answer as directed, but do not use rounded numbers in intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)

Effective annual rate = (1+APR/12)^12 - 1

Effective annual rate = (1+32.90%/12)^12 - 1

Effective annual rate = 38.34%

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