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A bank customer is granted credit for a $2,000 loan at 10% to be repaid in 12 equal installments.
-If the loan quoted has an add-on rate, what is the approximate annual percentage rate (APR) on the loan?
A)20%
B)18%
C)14%
D)12%
E)10%

Question

Use the following information for questions 
A bank customer is granted credit for a $2,000 loan at 10% to be repaid in 12 equal installments.
-If the loan quoted has an add-on rate, what is the approximate annual percentage rate (APR) on the loan?
A)20%
B)18%
C)14%
D)12%
E)10%

Quizplus · Accepted Answer

An add-on rate implies that the interest is added to the principal amount borrowed, and the total amount is then divided into equal payments. In this case, the total amount payable would be $2,200 ($2,000 + 10% of $2,000) divided into 12 payments of $183.33. To convert this into an APR, we can use a formula that considers the total interest paid over the life of the loan and the average outstanding balance. Using this formula, the approximate APR for this loan is 18%.

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