How to Calculate Effective Annual Rate (EAR) on a Car Loan with Monthly Interest Charging

What is the effective annual rate (EAR) on a car loan with a nominal rate of 6.13 percent and monthly interest charging?

EAR = __ %

Effective Annual Rate (EAR) Calculation:

The effective annual rate (EAR) on the car loan is approximately 6.28 percent. To calculate the effective annual rate (EAR), we need to consider the compounding effect.

To calculate the effective annual rate (EAR) on a car loan with a nominal rate of 6.13 percent and monthly interest charging, we can use the formula:

EAR = (1 + i/n)^(n-1)

Where:

i = nominal rate (converted to decimal)

n = number of compounding periods per year

In this case, the nominal rate is 6.13 percent, which is converted to a decimal as 0.0613. Since interest is charged monthly, there are 12 compounding periods in a year (monthly compounding).

Plugging in the values into the formula, we get:

EAR = (1 + 0.0613/12)^(12-1)

Calculating this expression, we find that the effective annual rate (EAR) on the car loan is approximately 6.28 percent. Therefore, the EAR is 6.28 percent.