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?

Question

Ayla Mcmillan

Business

1 March, 03:45

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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Answers (1)

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Kaleb Bridges · Answer 1

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%.