Question 1140099: Give the add-on interest rate: a $5,000 loan for one year at 6% APR with a monthly payment of $430.33
Answer by Theo(13342)   (Show Source):
You can put this solution on YOUR website! i'll take a stab at what i think you want, because i'm not exactly sure what it is.
if the loan is $5,000 for 12 months and the APR is 6% and the payment on the loan is equal to $430.33 at the end of each month, this means that you are dealing with a normal compound interest type loan where the interest is charged on the remaining balance of the loan, which is reduced by the principal part of the loan payment at the end of each month.
if this were an add-on interest type loan, the interest would be charged up front and the payment would then be calculated based on the principal plus the interest.
in that case, you wind up paying all of the interest rather than just the interest on the remaining balance of the loan.
with add-on interest type loan at APR of 6%, $5,000 * .06 = $300 interest which is added to the principal for a total loan amount of $5300.
this is then divided by 12 to get monthly payments of $441.67.
in the compound interest type loan, if the monthly payments were $441.67, the equivalent APR would be equal to 10.9%.
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