You are getting a discount loan of $25,000 for one year. The stated rate of interest is 6%. Calculate the effective interest rate.

Question

Quizplus · Accepted Answer

The effective interest rate is calculated by dividing the interest amount by the actual loan amount received. Here, the interest for one year is $25,000 * 6% = $1,500. Since it's a discount loan, the interest ($1,500) is deducted upfront, so you receive $25,000 - $1,500 = $23,500. The effective interest rate is $1,500 / $23,500 = 0.0638 or 6.38%.

You Are Getting a Discount Loan of $25,000 for One