(2) A 2 year, $6,000 loan at 7% interest with monthly payments. The lender charges you...

(2) A 2 year, $6,000 loan at 7% interest with monthly payments. The lender charges you a $100 fee that can be paid off, interest free, in equal monthly installments over the life of the loan. Thinking of the fee as additional interest, what is the actual interest rate you will pay?

Solutions

Expert Solution

Calculating Monthly Payment without fee,

Using TVM Calculation,

PMT = [PV = 6,000, FV = 0, N = 24, I = 0.07/12]

PMT = $268.64

$100 additional fee makes

Monthly Payment = 268.64 + 100/24 = $272.81

Calculating APR,

Using TVM Calculation,

I = [PV = 6,000, PMT = -272.81, FV = 0, N = 24]

I = 8.53%

Actual Interest Rate = 8.53%

jeff jeffy answered 1 year ago

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