Question

A local finance company quotes an interest rate of 18.7 percent on one-year loans. So, if you borrow $42,000, the interest for the year will be $7,854. Because you must repay a total of $49,854 in one year, the finance company requires you to pay $49,854/12, or $4,154.50 per month over the next 12 months. a. What rate would legally have to be quoted

Answer 1

Answer:

32.88%

Explanation:

For computing the rate we need to apply the RATE formula i.e to be shown in the attachment below:

Given that,  

Present value = $42,000

Future value or Face value = $0

PMT = $4,154.50

NPER = 12 months

The formula is shown below:  

= Rate(NPER;PMT;-PV;FV;type)  

The present value come in negative  

So, after applying this above formula, the rate is

= 2.74% × 12 months

= 32.88%