Stumbled upon this question which I could not crack:
“A interest rate manipulator offers you the following: If you borrow $1,000 for three years at 17.3% interest, in three years you owe him 1000*(1+17.3%)3 = $1,613.96. The manipulator has decided to break down the payments for you per month and accordingly allows you to make low monthly payments of 1,613/36 = $44.83 per month, as a favor”. Is the interest rate on this loan really 17.3%? Why or why not? What is the APR on this loan? What is the EAR? Why is it called add on interest?
Okay let me take a step back to what I know.
(FV/PV)(1/n) - 1 => effectively how much interest we are paying on the loan, doing this I get 17.3% so I do not see anything weird about this loan.
Treating this as a PV annuity and solving for r I get PV = 1000 Pmt = -44.83 if I pay him $44.83 every month for 36 months, I am still ending up paying $1,613 the loan amount … why is it ok to pay the $1,613 at the end of the third year but not split it? N = 36 CPT I/Y –> 2.856% per month
I see that, but what I am having trouble figuring out (how to incorporate these rate figures) and (where I am being manipulated in this situation) since I already used 17.3% to reach the final amount.
Yes Sir, but you agreed to borrow $1,000 for three years at 17.3% and you know that you owe me $1,613 at the end of the third year. If I ask you to pay $44.83 every month for 36 months, you pay to what you agreed to. Just trying to take it from here, where is the manipulation if you ended up paying what you agreed to?
