A student wanted to buy a car costing $24,000 from a dealer offering 0% down payment and financing at 12% interest rate over 60 months. Her disposable income is $500 per month.

a) What monthly interest rate can she afford? What effective interest rate is this?

b) Insurance on this car will be $50 per month more than she had planned, which will leave her with only $450 per month for her car payment. Now what monthly interest rate can she afford? What effective interest rate is this?

[The answer is shown to be a)9.4% and b)4.8%]