Question

You are looking at a one-year loan of $16,500. The interest rate is quoted as 8.7 percent plus two points. A point on a loan is 1 percent (one percentage point) of the loan amount. Quotes similar to this one are common with home mortgages. The interest rate quotation in this example requires the borrower to pay two points to the lender up front and repay the loan later with 8.7 percent interest. What rate would you actually be paying here?

Answer 1

10.7%

Step-by-step explanation:

2% of the loan value added to the 8.7% of the loan value that you're paying in interest is ...

2% + 8.7% = 10.7%

The effective rate for this 1-year loan is 10.7%.