Question

To purchase a used automobile, you borrow $10,000 from Loan Shark Enterprises. They tell you the interest rate is 1% per month for 35 months. They also charge you $200 for a credit investigation, so you leave with $9,800 in your pocket. The monthly payment they calculated for you is $385.71/month.
If you agree to these terms and sign their contract, what is the actual APR (annual percentage rate) that you are paying?

Answer 1

Answer:

The actual APR (annual percentage rate) that you are paying is 12.69%.

Explanation:

The actual annual percentage rate (APR) can be calculated using the Annual Percentage Rate (APR) formula as

follows:

APR = (((Fees + Interest accrued) / Principal / n) * Number of months in a year) * 100 ……………… (1)

Where;

APR = ?

Fees = Credit investigation charged = $200

Principal = Amount borrowed = $10,000

Total accrued amount = Principal * (1 + (Monthly interest rate * Number of months of loan tenure)) = $10,000 * (1 + (1% * 35)) = $13,500

Interest accrued = Total accrued amount - Principal = $13,500 - $10,000 =$3,500

n = Number of months of loan term = 35

Number of months in a year = 12

Substituting the values into equation (1), we have:

APR = (((200 + 3500) / 10000 / 35) * 12) * 100

APR = 12.69%

Therefore, the actual APR (annual percentage rate) that you are paying is 12.69%.