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You want to borrow £98,000 from your local bank to buy a new yacht. You can...

You want to borrow £98,000 from your local bank to buy a new yacht. You can afford to make monthly payments of £2,000, but no more. Assuming monthly compounding, what is the highest rate you can afford on a 60-month loan?

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Answer #1

Loan Amount = £ 98000, Monthly Payments = £ 2000, Tenure = 60 months and let the highest possible rate be r per month

Therefore, 98000 = 2000 x (1/r) x [1-{1/(1+r)^(60)}]

Using a financial calculator/trial and error/EXCEL's Goal Seek Function to solve the equation we get:

r = 0.006896 or 0.6896 %

Therefore, highest possible annual interest rate = 0.6896 x 12 = 8.2747 % ~ 8.275 %

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