You buy furniture for $700. The retailer finances the entire amount for one year and says you will be charged 9% interest. The retailer uses the add-on method. Assuming your first monthly payment is due in one month, calculate the real annual rate you will pay.

Answer 1

Using this weird method, monthly payment = (700 + 700(.09)(1)/12 = 763/12 = 63.58

let the real monthly rate be x

63.58(1 - (1+x)^-12)/x = 700

this type of equation is very messy to solve, so let's go to Wolfram
https://www.wolframalpha.com/input/?i=solve+63.58(1+-+(1%2Bx)%5E-12)%2Fx+%3D+700

to get x = .0135054
annual rate = .162...
or appr 16.2%, quite a bit more than the stated 9%