Jessica is planning to buy a new car The car price is 28000

Jessica is planning to buy a new car. The car price is $28,000 with a down payment of $10,000. Jessica was able to save the $10,000 for her dream car. If the monthly payment is $500 for 5 years, what is the annual nominal interest rate on this loan? What is the annual effective interest rate? Use interpolation if necessary. Excel solution is NOT accepted. Round the answer to 2 decimal places (i.e. 12.34%).

Solution

Amount Borrowed = $28000 - $10,000 $18,000.00 Monthly Payment $500.00 Period = 5 x 12 60 Annual nominal interest Rate (calculated below) 1.86% Payment = r x PV/(1-(1+r)^n Putting values in this Equation $500 = r x $18000/(1-(1+r)^-60 Rate = r 1.86% Monthly Annual Nominal rate of interest 22.32% Effective rate of interest = (1+22.32%/12)^12 )-1 24.75%