Question

The EZ Credit Company offers to loan a college student $6,000 for school expenses. Repayment of the loan will be in monthly installments of $304.07 for 24 months The total repayment of money is $7,297.68, which includes the original $6,000, $1,207.04 in interest charges, and $90 64 for a required life insurance policy covering the amount of the loan. Assume monthly compounding of interest. What nominal interest rate is being charged on this loan? The nominal interest rate that is being charged on this loan is 15% per year. (Round to two decimal places.)

Answer 1

ANSWER:

Monthly installment = $304.07

n = 24 months

pv = $6,000

pv = monthly installment(p/a,i,n)

6,000 = 304.07(p/a,i,24)

6,000 / 304.07 = (p/a,i,24)

19.73 = (p/a,i,24)

solving via trial and error we get that i is 1.63% per month.

now we will find the nominal rate:

nominal rate = (1 + i) ^ n - 1

i = 1.63%

n =12

nominal rate = (1 + 1.63%) ^ 12 - 1 = (1.0162952) ^ 12 - 1 = 1.2141 - 1 = 0.2141 or 21.41%

so the nominal rate is 21.41%