A local finance company quotes a 16 percent interest rate on one-year loans. So,

Question

A local finance company quotes a 16 percent interest rate on one-year loans. So, if you borrow $18,000, the interest for the year will be $2,880. Because you must repay a total of $20,880 in one year, the finance company requires you to pay $20,880/12, or $1,740.00, per month over the next 12 months. Is this a 16 percent loan?

What rate would legally have to be quoted? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

What is the effective annual rate? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

A local finance company quotes a 16 percent interest rate on one-year loans. So, if you borrow $18,000, the interest for the year will be $2,880. Because you must repay a total of $20,880 in one year, the finance company requires you to pay $20,880/12, or $1,740.00, per month over the next 12 months. Is this a 16 percent loan?

Explanation / Answer

1) The PV of the loan $18,000

Monthly payments (PMT) = $1,740

Number of payments (N) = 12

As we know the PV of an annuity = PV of cash flows = PMT * [{1

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