Question

Big Dom’s Pawn Shop charges an interest rate of 27.5 percent per month on loans to its customers. Like all lenders, Big Dom must report an APR to consumers. What rate should the shop report? (Do not round intermediate calcualtions. Enter your answer as a percent rounded to 1 decimal place, e.g., 32.1.) APR % What is the effective annual rate?

Answer 1

Answer:

APR is 330% and EAR is 1745.53%

Explanation:

Given:

Monthly interest rate = 27.5%

APR or annual percentage rate = 27.5×12 = 330%

So, Big Dom should report an APR of 330% to customers.

EAR or effective annual rate = $(1+\frac{APR}{m}) ^{m}-1$

Here,

APR is 330% and m is 12

330÷12 = 27.5%

substituting the value in the above formula:

EAR = $1.275^{12}-1$

        = 17.4553 or 1745.53%