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Add-on interest rates and APRs are not equivalent. This is because the add-on calculation (using the equation I = PRT, where I is the add-on
Add-on interest rates and APRs are not equivalent. This is because the add-on calculation (using the equation I = PRT, where I is the add-on interest, Pis the amount borrowed, R is the interest rate, and T is the time of the loan in years) assumes that the original debt is owed for the entire period of the loan. However, in reality the debt goes down as the loan is repaid. The following equation shows the n-ratio method for estimating the APR for an add-on loan: APR = Y (95P 9)F 12P(P+ 1)(4D+F) where: APR = Annual Percentage Rate Y = Number of Payments in One Year F = Finance Charge in Dollars (Dollar Cost of Credit) D = Debt (Amount Borrowed or Proceeds) P = Total Number of Scheduled Payments Consider the following example: Assume that Janet Zhou from Salt Lake City, Utah borrows $1,500 for two years at 9% add-on interest to be repaid in 24 monthly installments. Step 1: Calculate the amount of add-on interest (in dollars) for Janet's loan. (Hint: Use the equation I = PRT, where I is the interest in dollars, P is the amount borrowed, R is the interest rate, and is the time of the loan in years.) The add-on interest for Janet's loan is $ Step 2: Identify the values of the following variables in preparation for calculating the APR using the n-ratio method. Y = Number of Payments in One Year = F = Finance Charge in Dollars (Add-on Interest from Step 1) = $ D = Debt (Amount Borrowed) = $ P = Total Number of Scheduled Payments = Step 3: Y (95P+9)F Use the equation APR = to estimate the APR for Janet's loan. Round 12P(P + 1)(4D+F) your answer to the nearest 0.1%. The APR for Janet's loan is estimated to be %
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