Suppose you are offered an automobile loan at an APR of 6 pe

Suppose you are offered an automobile loan at an APR of 6% per year. What does that mean, and what is the true rate of interest, given monthly payments? Assume $10,000 loan amount.

Solution

The interest paid each month = 6%/12 = 0.5%

the actual rate of interest = (1 + 0.5%)^12 - 1

actual rate of interest or Effective annual rate = 6.17%