Question

To borrow $1,600, you are offered an add on interest loan at 8.2 percent with 12 monthly payments. Compute the 12 equal payments. (Round your answer to 2 decimal places.) Equal Payments

Use the amount you borrowed and the monthly payments you computed to calculate the APR of the loan. Then, use that APR to compute the EAR of the loan. (Do not round intermediate calculations and round your answer to 2 decimal places.) EAR ____ %

Answer 1

Loan = Principal = $1600, Interest rate = 8.2%, Period of loan = 12 months = 1 year

In add on method, total interest paid over tenure of loan is calculated using Principal of loan

Total interest to be paid over tenure of loan = principal x interest rate x no of years of loan = 1600 x 8.2% x 1 = 131.20

Total amount paid over tenure of loan = principal + Total interest to be paid over tenure of loan = 1600 + 131.20 = 1731.20

Monthly payment of add on interest loan = Total amount paid over tenure of loan / No of months = 1731.20 / 12 = 144.2666 = 144.27 (rounded to two decimal places)

Equal payments = $144.27

To find the APR of loan we need to first find the monthly rate of loan, We can find the monthly rate of loan using RATE function in excel

Formula to be used in excel: =RATE(nper,-pmt,pv)

Using RATE function in excel, we get monthly rate of loan = 1.2341%

APR = monthly rate of loan x 12 = 1.2341% x 12 = 14.8092% = 14.81% (rounded to two decimal places)

Hence APR of loan = 14.81%

EAR = (1+monthly rate)¹² - 1 = (1+1.2341%)¹² - 1 = (1.012341)¹² - 1 = 1.158569 - 1 = .0.158569 = 15.8569% = 15.86% (rounded to two decimal places)

Hence EAR of loan = 15.86%