You have just borrowed R20,000 to buy a new car.The loan agreement calls for 60 monthly payments of R444.89 each to begin one month from today.If the interest is compounded monthly, then what is the effective annual rate on this loan?

Question

Quizplus · Accepted Answer

The total amount of payments will be 60 × R444.89 = R26,693.40. The total interest paid will be R26,693.40 – R20,000 = R6,693.40. The monthly interest rate is therefore (6,693.40/60)/20,000 = 0.0056 = 0.56%. The effective annual rate is (1+0.0056)^12 – 1 = 0.1268 or 12.68%. Therefore, the best choice is A.

You Have Just Borrowed R20,000 to Buy a New Car