Priya takes out a loan from the Deep Bay Bank for $30,000 to buy a new Prius.
Question:
Priya takes out a loan from the Deep Bay Bank for $30,000 to buy a new Prius. The interest rate changed is j26 = 7.54% p.a. The loan is to be repaid over 4 years with the first payment due in a fortnight’s time. The terms of the loan are that it is an interest only loan for the first year (first 26 payments), at which time it converts to a fully amortized P&I loan. The Deep Bay Bank charges a fee of $600 to convert the loan from an interest only loan to P&I loan, and this fee is paid at the same time as the first payment on the P&I loan. That is, payment number 27 rather than being R’ is actually R’+600. Determine the j26 interest rate that Priya is effectively paying on the car loan.
[Hints: You could attempt this as a find i “price is right” approach as outlined in the notes, although it will be a fair bit of work for four marks. Alternatively, you could do a little research on Internal Rate of Return, and in particular on Excel’s IRR function. The IRR that the bank achieves on the loan will be the same as the interest rate that Priya is effectively paying.]