# You want to buy a car, and a local bank will lend you $20,000. The loan would be fully amortized... ## Question: You want to buy a car, and a local bank will lend you$20,000. The loan would be fully amortized over 5 years (60 months), and the normal interest rate would be 12%, with interest paid monthly.

A. What is the monthly loan payment?

B. What is the loan's EFF%?

## EFF%:

EFF% is the effective percent interest rate on a loan. This is also called effective annual rate (EAR). Due to the compounding effect of interest, the higher the compounding frequency, the higher the EFF%.

## Answer and Explanation:

A.

Since interest is paid monthly, the monthly interest rate is 12% / 12 months = 1% per month.

Let,

• PMT = monthly payment
• n = number of months =...

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#### Learn more about this topic: Effective Annual Rate: Formula & Calculations

from Business 110: Business Math

Chapter 7 / Lesson 6
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