On money that you lend to your friends, you charge 1 percent interest per month. The APR on your...

Question:

On money that you lend to your friends, you charge 1 percent interest per month. The APR on your loans is _____percent and the EAR is _____ percent.

APR vs EAR:

Lenders are required to disclose the annual percentage rate (APR) to borrowers. This rate is calculated on the loan's principal. The effective annual rate (EAR), on the other hand, is calculated on both the principal and previous interest.

Answer and Explanation:

The annual percentage rate (APR) formula is:

{eq}APR=Months*Monthly \ rate\\ APR=12*0.01\\ APR=12\%\\ {/eq}

The effective annual rate (EAR) formula is:

{eq}EAR = (1+Monthly \ rate)^{Months}-1\\ EAR = (1+0.01)^{12}-1\\ EAR = 12.68\%\\ {/eq}

The APR on your loans is 12 percent and the EAR is 12.68 percent.


Learn more about this topic:

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Effective Annual Rate: Formula & Calculations

from Business 110: Business Math

Chapter 7 / Lesson 6
15K

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