Question

Using the add-on method, calculate the APR of a loan for $12,050 at 9% for 2 years. (Do not round intermediate calculations. Round your answer to the nearest tenth percent.)

Answer 1

To calculate the APR of a loan using the add-on method, convert the interest rate to a decimal, calculate the total interest paid, add it to the loan amount, divide by the loan term, and calculate the APR by dividing the average annual repayment amount by the loan amount and multiplying by 100.

Step-by-step explanation:

To calculate the APR (Annual Percentage Rate) of a loan using the add-on method, you need to follow these steps:

1. Convert the interest rate from a percentage to a decimal by dividing it by 100. In this case, the interest rate is 9%, so it becomes 0.09.
2. Calculate the total interest paid by multiplying the loan amount ($12,050) by the interest rate (0.09) and the loan term (2 years). This gives you $2,739.
3. Add the total interest to the loan amount to get the total repayment amount. In this case, it would be $12,050 + $2,739 = $14,789.
4. Divide the total repayment amount by the loan term (2 years) to get the average annual repayment amount. This would be $14,789 / 2 = $7,394.5.
5. Finally, calculate the APR by dividing the average annual repayment amount ($7,394.5) by the loan amount ($12,050) and multiplying by 100. This gives you an APR of approximately 61.3%.