What is effective annual interest rate

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A used car dealer advertises financing at 4% interest over 3 years with monthly payments. You must pay a processing fee of $250 at signing. The car you like costs $6000.

(a) What is your effective annual interest rate?

(b) You believe that the dealer would accept $5200 if you paid cash. What effective annual interest rate would be paying if you financed with the dealer?

(c) Compare these answers with those for Problem 7-45. What can you say about what matters the most for determining the effective interest rate?

Reference no: EM131806372

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