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    Loans and Interest Rates: Purchasing a Car

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    John Fleming has been shopping for a loan to finance the purchase of a used car. He has found three possibilities that seem attractive and wishes to select the one with the lowest interest rate. The information available with respect to each of the three $5,000 loans is shown in the following table:

    Loans Principal Annual Payment Term (years)
    A $5,000 $1,352.81 5
    B $5,000 $1,543.21 4
    C $5,000 $2,010.45 3

    a. Determine the interest rate associated with each of the loans.
    b. Which loan should John take?

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    Solution Preview

    A) from the given information, I calculated these rates based Sharp Business/Financial calculator
    Loans A: PV=5000, FV=0, PMT=1352.81, n=5. You will get an interest rate of 10.998, which is approximately 11%.
    Loan B: PV=5000, FV=0, PMT=1543.21, n=4. You will get an interest rate of 8.996, which is approximately 9%

    Solution Summary

    This response which loan John Fleming should take based on the interest rate and term.