Question

A finance company offers a "12% plan". The cost of a one-year loan is 12%, and this cost is added to the loan. This total is then divided by 12 to get the monthly payments. Calculate the effective interest rate being charged for a loan of $12,000.

a. 1.79% per year
b.19.16% per year
c. 23.70% per year
d. 21.46% per month

Answer 1

The effective interest rate for a loan of $12,000 under the '12% plan' is 1.79% per year.

Step-by-step explanation:

To calculate the effective interest rate for a loan of $12,000 under the '12% plan', we need to divide the total cost of the loan by the loan principal. The total cost of the loan is the sum of the loan principal and the interest charged over one year. In this case, the total cost would be $12,000 + 12% of $12,000. Dividing this total by 12 gives us the monthly payments. Finally, to find the effective interest rate, we need to convert the monthly payments back to an annual interest rate.

Using the formula:

Effective interest rate = (1 + monthly interest rate)12 - 1

Substituting the values:

(1 + monthly interest rate)12 = monthly payments / loan principal

Here, the effective interest rate comes out to be 1.79% per year.