In: Finance
d. Determine the APR for the loan from the credit union. Do not round intermediate calculations. Round the answer to 2 decimal places. (1)
Given:
Loan amount = $ 3000
Furniture Store offer:
Interest rate = 7% (Add-on Interest)
Tenure = 36 months = 3 years
Credit union Offer:
Interest rate = 11.5% (Simpe Interest)
Tenure = 24 months = 2 years
Solution a:
The monthly payments for the loan from the furniture store include add-on interest. Add-on interest refers to the calculation method of determining the total interest to be paid on a loan. This interest is added to the Principal and the total amount is divided by tenure to determine the monthly payment.
Interest payment = Principal * Annual Interest Rate * Tenure
Interest = 3000 * 7% * (36/12) = 630
Monthly Payments = (Principal + Interest ) / 36
=(3000 + 630) / 36
=3630 / 36
= 100.833
Hence, The monthly payments for the loan from the furniture store is 100.833
Solution b:
Monthly payments for the loan from the credit union: Simple Interest
In this case, Interest is chanrged only on the outstanding principal payments and not the whole Principal amount throughout the tenure.
This can be calculated using the PMT formula in Excel.
PMT(rate,nper, pv)
where, rate is the Interest rate per period = 11.5% / 12
nper is the number of periods = 24
pv is the present value of the Loan = 3000
PMT(11.5%/12,24,-3000) = 140.52
The Monthly Payment = $ 140.52
Solution c:
APR can be calculated using RATE function in Excel.
RATE(nper, pmt, pv),
wehre nper is the number of periods,
pmt is the Monthly installment,
pv is the present value of the loan
APR (Furniture Store) :
RATE(36, 100.833, -3000) = 1.07%
APR = 1.07% * 12 = 12.83%
APR for the loan from the furniture store is 12.83%
Similarly for the Crdit Store:
APR = RATE(24,140.52,-3000) * 12 = 0.96% * 12 = 11.50%
APR for the loan from the credit union is 11.50%