1 Press Ctrl-A ©G Dear 2010 – Not to be sold/Free to use Cost of a Loan Stage 6 - Year 12 General Mathematic

2 Often Finance Companies quote their interest rate as a flat interest rate even though they use a reducible interest rate. Why? So that they look better than the Banks who always quote as a reducible interest rate. 18% flat may not be better than 25% reducible depending on the time involved.

3 How can we tell which is best? E = (1 + r) n – 1 n Use the formula E ffective reducible rate of interest. Flat R ate of interest per period N umber of periods (Click on the letters) Don’t Delete

4 Tricky Finance Company advertises a loan at 7% p.a. flat for 5 years? The Friendly Bank advertises a loan at 9% p.a. reducible for 5 years? Which is best? E = (1 + r) n -1 n = ( ) 5 – 1 5 ≈ 8% reducible Tricky Finance was best