Calculating EAR A local finance company quotes a 16 percent interest rate on one-year loans. So, if you borrow $26,000, the interest for the year will be $4,160.

Because you must repay a total of $30,160 in one year, the finance company requires you to pay $30,160y12, or $2,513.33, per month over the next 12 months. Is this a 15 percent loan? What rate would legally have to be quoted? What is the effective annual rate?