Problem 8-20 Installment loan for multiyears [LO2] Lewis and Clark Camping Suppl
ID: 2617850 • Letter: P
Question
Problem 8-20 Installment loan for multiyears [LO2] Lewis and Clark Camping Supplies Inc. is borrowing $51,000 from Western State Bank. The total interest is $15,700. The loan will be paid by making equal monthly payments for the next three years What is the effective rate of interest on this installment loan? (Input your answer as a percent rounded to 2 decimal places.) Input variables: $51,000 $15,700 Loan amount Interest Payment frequency Annual number of payments Total number of payments Monthly 12 36 Solution and Explanation: 2 x Annual # of pmts x1nterest (# of total pmts + 1) x Principal Effective rate of interestExplanation / Answer
Answer:
A) 2 * Annual no. of PMTs * Interest
Annual No, of PMTs = 12 (Loan will be paid through monthly instalments)
Interest = 15700
= 2 * 12 * 15,700 = 376,800
B) (Total No. of PMTs + 1) * Principal
Total No. of PMTs = 12 *3 = 36 (Loan will be paid by monthly instalments in 3 years)
Principal = 51,000
= (36 + 1) * 51,000 = 1,887,000
Effective Interest Rate = (376,800 / 1,887,000) * 100 = 19.968%