A company borrowed $1500. It must make monthly payments of $40.50 for 42 months to pay off the loan. Use the constant ratio formula to find the annual percentage rate.
The Constant Ratio Formula for APR
APR ¡Ö 2NI
P(T +1)
where
N = number of payments per year (usually 12 since most loans are paid back in monthly payments)
I = finance charge (i.e., total interest plus any additional charges)
P = principal
T = total number of payments
42 pmts x $40.50 = total pd back $1701.
Loan is for $1500, the interest is $1701 - $1500 = $201
APR = 2(12)(201)
1500 (42+1)
= 4824 = 0.07479
64500
= 7.48 %