In: Economics
E.Z money who owns a chain of night clubs needs to borrow $20,000 to remodel the local drive. Ima shark offers to loan the $20,000 to money for 24 months, money must make the monthly payments of $1118. determine loan's monthly interest rate
Formula of EMI :
EMI = [P x R x (1+R)n] / [(1+R)n -1 ]
EMI = 1118
P = 20,000
n= 24 months
put values,
1118 = 20,000*R (1+R)24 / [( 1+ R)24 -1]
1118/ 20,000 = R (1+R)24 / [( 1+ R)24 -1]
0.0559 = R (1+R)24 /[( 1+ R)24 -1]
0.0559 = R (1+R)24 / [( 1+ R)24 -1]
Using trial and error method,
R = 0.29
so interest rate = 29% per annum
monthly interest rate = 29/12 = 2.42%
Interest rate can be calculated on excel,
=Rate(nper, pmt, pv, [fv], [type],
[guess])
where,
Rate is the monthly interest rate for the loan.
So, to get your annual interest you need to multiply it by
12.
Nper is the total number of payments for the loan
i.e. loan period in months
PMT is the EMI
PV is the present value. Enter Loan amount with a
negative sign as PV.
FV(Optional) - you can either enter 0 or leave it
blank.
Type (Optional) - you can either enter 0 or leave
it blank.
Guess (Optional) - Leave it blank.
Using this formula,we get
monthly interest rate= .0.24 = 2.4%