A new engineering graduate student who started a consulting

A new engineering graduate student who started a consulting business borrowed money for 1 year to buy necessary equipment and furnishings. The amount of the loan was $16,000, and it had an interest rate of 11% per year. Because the new graduate student did not have a credit history, the bank made him buy loan default insurance at the cost of 5% of the loan and charged a loan origination fee of $300, both paid up front. What was the effective interest rate that the engineer paid for the loan?

Solution

Interest on $16,000 for one year = $16,000 x 11% = $1,760

Additional Amount paid by the engineer = $16,000 x 5% + $300 = $800 + $300 = $1,100

Effective loan amount = $16,000 - $1,100 = $14,900

Effective interest rate = $1,760 / $14,900 = 0.1181 = 11.81%