Question

A local finance company quotes an interest rate of 16 percent on one-year loans. So, if you borrow $34,000, the interest for the year will be $5,440. Because you must repay a total of $39,440 in one year, the finance company requires you to pay $39,440/12, or $3,286.67 per month over the next 12 months.

Requirement 1: Is the interest rate on this loan 16 percent?

Answer 1

The interest rate on this loan is indeed 16 percent.

Step-by-step explanation:

The interest rate on this loan is not 16 percent. Let's calculate the actual interest rate:

Interest = Total amount repaid - Borrowed amount

Interest = $39,440 - $34,000 = $5,440

Actual interest rate = (Interest / Borrowed amount) * 100

Actual interest rate = ($5,440 / $34,000) * 100 = 16%

Therefore, the interest rate on this loan is indeed 16 percent.