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.

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  1. The Constant Ratio Formula for APR
    APR ¡Ö 2NI
    P(T +1)

    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

    = 7.48 %

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