Question

A car loan is taken for $13,000 to be paid back in 5 years, with monthly payments of $495. What nominal annual interest rate is being charged in this loan?

1) 27.42%

2) 42.26%

3) 39.00%

4) 2.29%

Answer 1

here we have loan amount is 13000

PV=13000

PMT=495

n=12 for monthly compound

t=5 years

...............(1)

as we can see here equation is complex so we cannot solve for variable

to find the value of "r" we have to use either trial and error method or we can check all 4 option

.

so check first value of r=27.42%

r=27.42% = 0.2742

put it back in equation 1

here both sides are not equal so first option is incorrect

.

.

.

.

check second value of r=27.42%

r=27.42% = 0.2742

put it back in equation 1

here both sides are not equal so second option is incorrect

.

.

.

.

check third value of r=27.42%

r=27.42% = 0.2742

put it back in equation 1

now both sides are equal

so answer is option C .........r=39%