You are looking at a one-year loan of $20,000. The interest rate is quoted as 8.
ID: 2631182 • Letter: Y
Question
You are looking at a one-year loan of $20,000. The interest rate is quoted as 8.0 percent plus four points. A point on a loan is simply 1 percent (one percentage point) of the loan amount. Quotes similar to this one are common with home mortgages. The interest rate quotation in this example requires the borrower to pay four points to the lender up front and repay the loan later with 8.0 percent interest.
What rate would you actually be paying here? (Round your answer to 2 decimal places. (e.g., 32.16))
You are looking at a one-year loan of $20,000. The interest rate is quoted as 8.0 percent plus four points. A point on a loan is simply 1 percent (one percentage point) of the loan amount. Quotes similar to this one are common with home mortgages. The interest rate quotation in this example requires the borrower to pay four points to the lender up front and repay the loan later with 8.0 percent interest.
Explanation / Answer
4 Points = $20,000 x .04 = $800
8% interest = $20,000 x .08 = $1600
Total paid = $800 + $1600 = $2400
Rate paid = ($2400 / $20,000) x 100 = 12.00%