Question

You are going to buy a new car worth $24,500. The dealer computes your monthly payment to be $514.55 for 60 months of financing. What is the dealer’s effective rate of return on this loan transaction?

Answer 1

9.92%

Step-by-step explanation:

First, find the Annual Percentage Rate (APR).

You can do this with a financial calculator using the following inputs;

PV = -24500

N = 60

PMT = 514.55

then CPT I/Y = 0.792% (this is a monthly rate)

APR = 0.792% *12 = 9.5%

Next, convert APR to EAR;

EAR =
`(1+(APR)/(m)) ^(m) -1`

whereby m= number of compounding periods per year ;12 in this case.

EAR =
`(1+(0.095)/(12)) ^(12) -1`

= 1.0992476 - 1

=0.0992476 or 9.92%

Therefore, the effective rate on this loan is 9.92%