You have just borrowed $20,000 to buy a new car. The loan agreement calls for 36 monthly payments of $700 each to begin one month from today. If the interest is compounded monthly, what is the effective annual rate on this loan?

The effective rate on the loan is 13/18% or 0.722%

Explanation:

36 monthly payments of $700 will give = 700*36=$25200

Amount = $25200

Principal = $20000

Interest = amount - principal

Interest = 25200 - 20000

=$5200

Rate = (100 * interest) / principal*time

= (100*5200) / (20,000*36)

=13/18 %

= 0.722%

The effective annual rate on the loan is 0.722%