How to Calculate Effective Annual Rate (EAR) of a Loan
Question:
If you are given a $90,000 fixed-rate loan from Wells Fargo Bank with 60 equal monthly payments at an APR of 7.00%, how can you determine the Effective Annual Rate (EAR) of this loan?
Answer:
To calculate the Effective Annual Rate (EAR) of a loan, you need to consider the Annual Percentage Rate (APR) and the compounding period. In this case, the loan has an APR of 7.00% and monthly payments.
In order to find the EAR of the loan, you can use the formula: EAR = (1 + APR/n)^n - 1, where n is the number of compounding periods per year. Since the loan has monthly payments, the compounding period in this case is monthly.
By plugging in the values, we can calculate the EAR as follows:
EAR = (1 + 7.00%/12)^12 - 1 = 7.23%
Therefore, the Effective Annual Rate (EAR) of the $90,000 loan from Wells Fargo Bank is 7.23%.