In a discount interest loan , you pay the interest payment up front. For example
ID: 2652480 • Letter: I
Question
In a discount interest loan, you pay the interest payment up front. For example, if a 1-year loan is stated as $24,000 and the interest rate is 21.75%, the borrower "pays" 0.2175 × $24,000 = $5,220 immediately, thereby receiving net funds of $18,780 and repaying $24,000 in a year. What is the effective annual rate on a 1-year loan with an interest rate quoted on a discount basis of 21.75%?
In a discount interest loan, you pay the interest payment up front. For example, if a 1-year loan is stated as $24,000 and the interest rate is 21.75%, the borrower "pays" 0.2175 × $24,000 = $5,220 immediately, thereby receiving net funds of $18,780 and repaying $24,000 in a year. What is the effective annual rate on a 1-year loan with an interest rate quoted on a discount basis of 21.75%?
Explanation / Answer
Let rate of Interest = X %
$ 18,780 + X % = $ 24,000
X % = 24000-18780 = 5220
Rate of interest = $5,220/ $18,780 *100 = 28% around