A local finance company quotes an interest rate of 16 percen

A local finance company quotes an interest rate of 16 percent on one-year loans. So, if you borrow $30,000, the interest for the year will be $4,800. Because you must repay a total of $34,800 in one year, the finance company requires you to pay $34,800/12, or $2,900.00, per month over the next 12 months. What rate would legally have to be quoted?

Solution

Monthly payment=principal*r*((1+r)^period)/((1+r)^period-1) Where r=monthly rate of interset, period= monthly periods 2900=30000*r*((1+r)^12)/((1+r)^12-1) At r=2.36%, monthly payment is equal to $ 2,900 Annual rate=2.36%*12=28.30%