Question

An auto dealership is advertising that a new car with a sticker price of $35,208 is on sale for $25,995 if payment is made in full, or it can be financed at 0% interest for 72 months with a monthly payment of $489. Note that 72 payments × $489 per payment = $35,208, which is the sticker price of the car. By allowing you to pay for the car in a series of payments (starting one month from now) rather than $25,995 now, the dealer is effectively loaning you $25,995. If you choose the 0% financing option, what is the effective interest rate that the auto dealership is earning on your loan?

Answer 1

The answer is: APR = 10.56%

Explanation: Using an excel spreadsheet and the RATE function, we can calculate the monthly interest rate of buying the car:

=RATE(72,-489,25995)

= 0.8803% monthly interest rate

Then we multiply the monthly interest rate by twelve to get the APR:

APR = 0.8803% x 12 = 10.56%