You have just borrowed $30,000 to buy a new car. The loan agreement calls for 48 monthly payments of $704.55 each to begin one month from today. If the interest is compounded monthly, then what is the effective annual rate (EAR)on this loan?

Question

Quizplus · Accepted Answer

The effective annual rate (EAR) is the annual rate that would produce the same total amount of interest as the periodic rate over the same period of time. In this case, the periodic rate is 704.55/30,000 = 0.023485. The EAR is then given by the formula EAR = (1 + i)^12 - 1, where i is the periodic rate. Plugging in the values, we get EAR = (1 + 0.023485)^12 - 1 = 0.0617, or 6.17%.

You Have Just Borrowed $30,000 to Buy a New Car