Question

You are going to buy a new car worth $23,900. The dealer computes your monthly payment to be $522.55 for 60 months of financing. What is the dealer's effective rate of return on this loan transaction? The dealer's effective rate of return is%. (Round to one decimal place.)

Answer 1

Amount of each monthly payment = $522.55

Total number of months = 60

Total amount to be repaid =

60 x 522.55 = 31, 353

Price of car = $23,900

The rate of return can be calculated by the following formula:

F.V. = P(1 + r/12)ⁿ

^{Where F.V. is the total amount to be repaid, P is the principal amount, r is the rate of interest and n denotes the number of periods.}

^{The rate of interest is divided by 12 because the monthly payments re calculated and there are 12 months in a year.}

^{Putting the values:}

31, 353 = 23, 900(1 + 60

1.31184 = (1 + 150

1.31184 = (1 +

1.00453 = (1 + )

0.00453 = in

r = 0.05436

Therefore, the rate of return is 5.4% (approximately).