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Month-end payments of $1,590 are made to settle a loan of

$136,940 in 8 years. What is the effective interest rate?

Answer :

The effective interest rate for a loan with month-end payments of $1,590, a principal amount of $136,940, and a loan term of 8 years is approximately 4.2%.

To calculate the effective interest rate, we can use the formula for the present value of an annuity. In this case, we have monthly payments of $1,590 for 8 years.

The present value of the loan is $136,940. By solving for the interest rate, we can find the effective interest rate.

Using a financial calculator or spreadsheet, we can plug in the values and solve for the interest rate. The calculation is as follows:

PV = $136,940

PMT = -$1,590 (negative because it represents an outgoing payment)

N = 8 years × 12 months per year = 96 months

Solving for the interest rate (I/Y), we find that it is approximately 0.35%. To convert this to an annual rate, we multiply it by 12, giving us an effective interest rate of approximately 4.2%.

Therefore, the effective interest rate for this loan is approximately 4.2%. It represents the annualized rate that takes into account the monthly payments and the principal amount over the 8-year loan term.

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