Question

Chase owns a chain of restaurants and needs to borrow $20,000 to remodel them by updating the color of the facade. Jacob offers to loan the $20,000 to Chase for 24 months. Chase must make monthly payments of $1,118. Determine the loan’s

(a) monthly interest rate

(b) effective annual interest rate

Answer 1

ANSWER:

1) Monthly interest rate:

pw = monthly payments(p/a,i,n)

20,000 = 1,118(p/a,i,24)

20,000 / 1,118 = (p/a,i,24)

17.889 = (p/a,i,24)

solving via trial and error we get that i is between 2% and 3% and solving further we get that i is 2.5%

2) effective interest rate:

eir = (1 + monthly rate) ^ n - 1 = (1 + 2.5%) ^ 12 - 1 = (1.025) ^ 12 - 1 = 1.3445 - 1 = 0.3445 or 34.45%

so the effective interest rate is 34.45%