Question

You borrow $1,000 from the bank and agree to repay the loan over the next year in 12 equal monthly payments of $90. However, the bank also charges you a loan initiation fee of $29, which is taken out of the initial proceeds of the loan. What is the effective annual interest rate on the loan, taking account of the impact of the initiation fee?

You borrow $1,000 from the bank and agree to repay the loan over the next year in 12 equal monthly payments of $90. However, the bank also charges you a loan initiation fee of $29, which is taken out of the initial proceeds of the loan. What is the effective annual interest rate on the loan, taking account of the impact of the initiation fee? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Use a financial calculator or Excel.) Effective annual interest rate

Answer 1

Effective Loan Amount = 1,000 - 29 = $971

Monthly Payment = $90

Calculating APR on loan,

Using TVM Calculation,

I = [PV = 971, PMT = -90, FV = 0, N = 12]

I = 20.11%

EAR = (1 + 0.2011/12)¹² - 1

EAR = 22.07%