Effective interest rates on loans


The Magic Pumpkin Limousine Company wants to purchase a car entertainment system for one of its automobiles. The entertaiment system vendor has offered to finance the $2,000 purchase over one year in 12 installments, with a total of $200 in interest to be paid on the loan. Magic Pumpkin's bank has offered to finace the purchase with an installment loan, where $155 in interest will be repaid and payments on the loan must be paid quarterly. What are the effective interest rates on these loans? Which loan should they select?

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Accounting Basics: Effective interest rates on loans
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