Question

Let’s assume you purchased a new car and finance it through the dealer. The purchase price was $30,000 including all fees, taxes and delivery costs. The dealer offered an ‘all inclusive’ financing plan at a 12% rate. Your 30 monthly payments were $1,300, derived by adding interest of $9,000 to the $30,000 and dividing by 30 monthly payments. Your friends tell you that your interest rate is above 20% and that you should have borrowed from your home equity line at a lower rate. Are they right?

Answer 1

real rate = 0.214051525

Your friends are right

Step-by-step explanation:

We have to calculate the rate at the present value of an annuity of 30 monthly payment of 1,300 which equals 30,000

`C * (1-(1+r)^(-time) )/(rate) = PV\\`

`1300 * (1-(1+r)^(-30) )/(rate) = 30,000\\`

we use excel, iteractive process or a financial calculator to solve for rate

0.0178376

this rate will be the monthly rate, we need to multiply by 12

0.0178376

x 12

0.214051525