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4 March, 04:17

In the past, a car manufacturer advertised 0% financing on many of its models. For example, a particular model had a cash price of $13,174.09. However, if you elected to buy the car under the 0% financing deal, then the manufacturer used a price of $15,408. If you chose a 48-month term, then the manufacturer calculated your monthly loan payments using the 0% financing price instead of the cash price ($321 per month). In the fine print, the manufacturer was legally obliged to disclose the effective annual rate that it charged for the loan. What rate did the manufacturer disclose?

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  1. 4 March, 07:18
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    Effective annual rate is 6.25%

    Explanation:

    Effective annual interest rate is real interest rate. Nominal rate does not reflect compounding interest or fees on some financial products like loans. Effective does and is calculated as following:

    (1 + i/n) ^n - 1, where i is nominal interest rate and n is the number of periods. If 321 dollars is the sum of monthly payments calculated as 15.408 * x * 48/12 = 321, which gives its effective monthly rate of 0.5% or annual rate of 6.25%.
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