You want to borrow $40,000 from your local bank to buy a new sailboat.You can afford to make monthly payments of $775,but no more.Assuming monthly compounding,what is the highest rate you can afford on a 60-month APR loan?

Question

Quizplus · Accepted Answer

Using the formula for finding the monthly payment on a loan with monthly compounding:
P = (r(PV))/1-(1+r)^-n
where P is the monthly payment, r is the monthly interest rate, PV is the present value or loan amount, and n is the number of payments.

Plugging in the given values:
PV = $40,000
P = $775
n = 60 months

Solving for r:
r = 0.005083 or 0.5083%

This is the monthly interest rate. To convert it to an APR or annual percentage rate, we need to multiply it by 12:
APR = 0.060995 or 6.1%

Therefore, the highest rate that meets the monthly payment requirement is 6.1 percent.

You Want to Borrow $40,000 from Your Local Bank to Buy