You want to borrow $36,000 from your local bank to buy a new sailboat. You can afford to make monthly payments of $750, but no more. Assuming monthly compounding, what is the highest rate you can afford on a 60-month APR loan?

Question

Quizplus · Accepted Answer

Using the loan formula, we can solve for the APR:

Loan amount = Payment x ((1-(1+r/12)^-n)/(r/12))

where r is the APR and n is the number of payments

Plugging in the given values:

$36,000 = $750 x ((1-(1+r/12)^-60)/(r/12))

To solve for r, we can use trial and error or Excel's Goal Seek function. The highest rate that can be afforded with monthly payments of $750 is 9.15 percent. Therefore, the answer is D.

You Want to Borrow $36,000 from Your Local Bank to Buy