Question

You are looking at a one-year loan of $13,000. The interest rate is quoted as 9.6 percent plus three points. A point on a loan is 1 percent (one percentage point) of the loan amount. Quotes similar to this one are common with home mortgages. The interest rate quotation in this example requires the borrower to pay three points to the lender up front and repay the loan later with 9.6 percent interest.

Required:
What rate would you actually be paying here?

Answer 1

Answer: 10.3%

Explanation:

The borrower is to pay 3 points on the loan to get it which means that the effective total they are getting is:

= 13,000 * ( 1 - 3%)

= $‭12,610‬

The borrower will also have to pay an interest of 7% so the total to pay back is:

= 13,000 * ( 1 + 7%)

= $‭13,910‬

Interest actually paid:

= Amount to paid back / Amount to be received - 1

= (13,910 / 12,610) - 1

= 10.3%