# Solution: What then will be the effective interest rate of a loan?

(Last Updated On: January 10, 2020)

#### Problem Statement: ME Board April 1998

It is the practice of almost all banks in the Philippines that when they grant a loan. The interest for one year is automatically deducted from the principal amount upon the release of money to a borrower. Let us therefore assume that you applied for a loan with a bank and the P80,000 was approved at an interest rate of 14% of which P11,200 was deducted and you were given a check of P68,800. Since you have to pay the amount of P80,000 one year after, what then will be the effective interest rate?

• A. 15.90%
• B. 16.28%
• C. 16.30%
• D. 16.20%

The effective interest rate of the loan is 16.28%.

Solution:

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