Question

When you purchased a car, you borrowed $20,000 from the bank and agreed to make monthly payments of $423.17 for 5 years. What rate of interest is the bank charging you

Answer 1

Answer:

4.88%

Explanation:

The formula to calculate the rate of interest is:

r=(FV/PV)^1/n-1, where

r=rate of interest

FV= future value= 423.17*(12*5)=423.17*60=$25,390.2

PV= present value= $20,000

n= number of periods of time= 5

Now, you can replace the values in the formula:

r=(25,390.2/20,000)^1/5-1

r=1.048-1

r=0.0488→4.88%

According to this, the answer is that the bank is charging an annual rate of interest of 4.88%.