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Chapter 3: 20BP (page 251)

Lewis and Clark Camping Supplies Inc. is borrowing \(51,000 from Western State Bank. The total interest is \)15,700. The loan will be paid by making equal monthly payments for the next three years. What is the effective rate of interest on this instalment loan?

Short Answer

Expert verified

The effective interest rate is 19.96%.

Step by step solution

01

Information provided in the question

Loan amount = $51,000

Loan term = 3 year

Interest rate = $15,700

02

Calculation of effective interest rate when equal monthly instalments have to be made

The effective interest rate is 19.96%.

Effectiverateoninstalmentloan=2×Annualnumberofpayments×InterestTotalnumberofpayments+1×Principal=2×12×$15,70036+1×$51,000=$376,800$1,887,000=19.96%

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