Determine the comparable interest rate (to two decimal places) for a $50,000 loan with this quoted information. 7.85% + 2 pts + $400 origination fee
A) $8.20 \%$
B) $7.85 \%$
C) $9.85 \%$
D) $8.00 \%$
E) $16.05 \%$

Question

Quizplus · Accepted Answer

The comparable interest rate takes into account not just the quoted interest rate, but also points and fees associated with the loan. Points are prepaid interest, with one point equaling 1% of the loan amount. Here, 2 points on a $50,000 loan equals $1,000. Adding the $400 origination fee gives a total of $1,400 in additional costs. These costs effectively increase the interest rate above the quoted 7.85%. The correct calculation would distribute these costs over the life of the loan, resulting in a higher effective interest rate, which is closest to 8.20% in this case.

Determine the Comparable Interest Rate (To Two Decimal Places) for a $50,000