Megan Green is interested in taking out a personal loan for $1,610. However, las
ID: 3102670 • Letter: M
Question
Megan Green is interested in taking out a personal loan for $1,610. However, last year an identity theft scam left her with poor credit. Since then she has learned about the perils of identity theft from personal experience as well as from a variety of sources, including the August 18, 2009, article “Avoiding the Identity Theft Underworld” on www.forbes.com. Because of the resulting poor credit score due to the identity theft and the fact that she is providing no collateral, the bank is going to charge her a fee of 3.0% of her loan amount as well as take out the interest upfront. The bank is offering her 12% APR for six months.Calculate the effective interest rate. (Use 360 days a year. Do not round intermediate calculations and round your final answer to the nearest whole number. Omit the "%" sign in your response.)
effective interest rate __________
Explanation / Answer
The up front loan fee is $1,610 X 3% = $48.3 The interest for 6 months that Megan will pay is $1,610 X 12% / 2 = $96.6 The net amount of the loan that Megan will receive is therefore $1,610 - $48.3 - $96.6 = $1465.1 To solve this I used the RATE function in Excel. I: Entered -$1,465.10 as the Present Value Entered $1,610.00 as the Future Value Entered 180 days as the Number of Periods. The Rate calculates as 0.055471%. That is a daily rate. To calculate the Annual rate, you multiply that by 360. 360 X 0.055471% = 19.97% That rounds to 20%