Do not use the APR formula for this problem.Coverall Carpets Inc.is planning to borrow $12,000 from the bank.The bank offers the choice of a 12 percent discounted interest loan or a 10.19 percent add-on,one-year installment loan,payable in 4 equal quarterly payments.What is the effective rate of interest on the 10.19 percent add-on loan?
A) 9.50%
B) 10.19%
C) 15.22%
D) 16.99%

Question

Quizplus · Accepted Answer

The effective interest rate for an add-on loan is higher than the nominal rate because interest is calculated on the original principal for the entire period. The total interest is added to the principal and divided by the number of payments. The effective rate is calculated based on the actual amount of money used, which results in a higher rate than the nominal 10.19%.

Do Not Use the APR Formula for This Problem