Calculating the APR when the add-on method is used

Add-on interest rates and APRs arenotequivalent. This is because the add-on calculation (using the equationI=PRT, whereIis the add-on interest,Pis the amount borrowed,Ris the interest rate, andTis 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:

Transcribed Image Text:

APR Y(95P+9)F 12P(P+1)(4D+F) APR Y(95P+9)F 12P(P+1)(4D+F)

Answer rating: 100% (QA)

Solution To calculate the APR using the addon method you can use the following equation APR 12PP14DF ... View the full answer