When you purchased a car, you borrowed $20,000 from the bank and agreed to make monthly payments of $423.17 for 5 years. What rate of interest is the bank charging you?
A) 9.82%
B) 5.00%
C) 25.39%
D) 10.00%

Question

Quizplus · Accepted Answer

To find the rate of interest, we need to use the formula for calculating the monthly payment on a loan:

PMT = (P * r * (1+r)^n) / ((1+r)^n - 1)

where PMT is the monthly payment, P is the principal amount borrowed, r is the monthly interest rate, and n is the number of months of the loan.

Plugging in the given values, we have:

PMT = $423.17
P = $20,000
n = 5 years * 12 months/year = 60 months

We can solve for r by trial and error or by using a financial calculator or spreadsheet software. The result is approximately 0.008185 or 0.8185%. To convert this to an annual rate, we multiply by 12:

r = 0.008185 * 12 = 0.09822 or 9.82%

Therefore, the bank is charging an interest rate of 9.82% on the car loan. Answer choice A) is the only correct choice.

When You Purchased a Car, You Borrowed $20,000 from the Bank