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(1) A 5-year auto loan for $20,000 has monthly payments at an 8% nominal annual rate. If the borrower must pay a loan origination fee of 2.5 points, which is the true effective cost of the loan? What would the APR be?

(1) A 5-year auto loan for $20,000 has monthly payments at an 8% nominal annual rate. If the borrower must pay a loan origination fee of 2.5 points, which is the true effective cost of the loan? What would the APR be?

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Some lenders charge an up-front fee on a loan, which is subtracted from what the borrower receives. This is typically described as "points" (where on point equals 1% of the loan amount). The federal government requires that this be accounted for in the APR that discloses the loan's cost. (1) A 5-year auto loan for $20,000 has monthly payments at an 8% nominal annual rate. If the borrower must pay a loan origination fee of 2.5 points, which is the true effective cost of the loan? What would the APR be? (2) If the car is sold after 3 years and the loan is paid off, what is the effective interest rate and the APR?
Transcribed Image Text:Some lenders charge an up-front fee on a loan, which is subtracted from what the borrower receives. This is typically described as "points" (where on point equals 1% of the loan amount). The federal government requires that this be accounted for in the APR that discloses the loan's cost. (1) A 5-year auto loan for $20,000 has monthly payments at an 8% nominal annual rate. If the borrower must pay a loan origination fee of 2.5 points, which is the true effective cost of the loan? What would the APR be? (2) If the car is sold after 3 years and the loan is paid off, what is the effective interest rate and the APR?
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