This problem illustrates a deceptive way of quoting interest rates called add-on

Question

This problem illustrates a deceptive way of quoting interest rates called add-on interest. Imagine that you see an advertisement for Crazy Judy's Stereo City that reads something like this: "$66,000 Instant Credit! 8.6% Simple Interest! 3 Years to Pay! Low, Low Monthly Payments!" You're not exactly sure what all this means and somebody has spilled ink over the APR on the loan contract, so you ask the manager for clarification. Judy explains that if you borrow $66,000 for 3 years at 8.6 percent interest, in 3 years you will owe: $66,000 x 1.0863 = $66,000 x 1.2808 = $84,534.39. Now. Judy recognizes that coming up with S84.534.39 all at once might be a strain, so she lets you make "low, low monthly payments" of $84,534.39 / 36 = $2,348.18 per month, even though this is extra bookkeeping work for her. The APR on this loan is %, and the EAR is %.

Explanation / Answer

Given= Monthly payment=$2,348.18

Solution:

APR=16.85%

EAR=8.6%

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