You have decided to buy a car that costs $34,100. The dealer offers you a 5-year loan with monthly
payments of $695 per month. What is the annual nominal interest rate on the loan?
To calculate the annual nominal interest rate on the loan, we can follow these steps:
Step 1: Calculate the total amount paid over the loan term.
Since the loan term is 5 years and the monthly payment is $695, we can multiply the monthly payment by the number of months in 5 years to find the total amount paid:
Total Amount Paid = Monthly Payment * Number of Months
Total Amount Paid = $695 * (12 months/year * 5 years)
Step 2: Calculate the interest paid over the loan term.
To determine the interest paid, we subtract the cost of the car from the total amount paid:
Interest Paid = Total Amount Paid - Car Cost
Interest Paid = ($695 * (12 months/year * 5 years)) - $34,100
Step 3: Calculate the annual nominal interest rate.
To find the annual nominal interest rate, we divide the interest paid by the car cost and multiply by 100 to convert it to a percentage:
Annual Nominal Interest Rate = (Interest Paid / Car Cost) * 100
By plugging in the respective values, we can calculate the annual nominal interest rate.