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Question

Jane buys a new car for $80000 and wants to take a car loan from a bank. She pays a down payment of $40000 and a monthly instalment of $879 for 5 years. The bank charges simple interest. What is the interest rate?

Answer 1

Principal Amount P = Value of the car - down payment = 80000 - 40000 = 40000.

Maturity Value A = Monthly instalment per month * Total Time in months

A = 879 *  60 = 52740

The future or maturity value A of P dollars at a simple interest rate r for t years is

A = P ( 1+ rt)

52740 = 40000 ( 1 + 5r)

1.3185 = 1+ 5r

5r = 0.3185

r = 0.3185/5 = 0.0637

Thus, the interest is 6.37%