Question

John bought a used truck for $4,500. He made an agreement with the dealer to put $1,500 down and make payments of $350 for the next 10 months. The extra cost paid by taking this deal is equivalent to what actual yearly rate of interest? A) 63% B) 33% C) 3.6% D) 36%

Answer 1

The extra cost can be calculated by working out the total he has spent and subtracting the value of the truck. He spends $1500 on a downpayment and (350 x 10 = $3500) on monthly payments, giving him a total outlay of $5000. This means he overspent by $500. $500 interest was paid for 10 months, so at that same rate, $600 would have been paid for 12 months. $600 as a percentage of the cost of the truck minus the down payment ($3000) is 20%.