Ricky Ripov’s Pawn Shop charges an interest rate of 18.25 percent per month on loans to its customers. Like all lenders, Ricky must report an APR to consumers. a. What rate should the shop report? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the effective annual rate? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
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Ricky Ripov’s Pawn Shop charges an interest rate of 18.25 percent per month on loans to its customers. Like all lenders, Ricky must report an APR to consumers. |
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| a. |
What rate should the shop report? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
| b. | What is the effective annual rate? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
APR (Annual Percentage Rate) and EAR (Effective Annual Rate) are two ways of measuring the cost of borrowing money.
APR is the annual rate of interest that is charged for borrowing, expressed as a single percentage number that represents the actual yearly cost of funds over the term of a loan. It takes into account the interest rate and any fees that are charged as part of the loan. APR is typically used to compare different loans or credit products and helps consumers understand the true cost of borrowing.
EAR, on the other hand, is a measure of the true cost of borrowing, taking into account the frequency of compounding. Unlike APR, it takes into account the effect of compounding and gives a better picture of the true cost of borrowing over a year. EAR is typically higher than APR and provides a more accurate representation of the true cost of borrowing, especially for loans with frequent compounding periods.
In short, APR gives an idea of the average annual cost of borrowing while EAR represents the actual annual cost, considering the frequency of compounding.
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