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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?

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beritop1089

Answer:

9.92%

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 = [tex](1+\frac{APR}{m}) ^{m} -1[/tex]

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

EAR =[tex](1+\frac{0.095}{12}) ^{12} -1[/tex]

= 1.0992476 - 1

=0.0992476  or 9.92%

Therefore, the effective rate on this loan is 9.92%