Math Experts: What Interest Rate Is This?

So my friend bought a used car at a cost of

Since he actually doesn’t have any money, a mutual aquaintenance agreed to purchase the car for him, spread the payments over 24 months, and for his troubles, added $50 per month for his financing fees.

So basically add $1,200 to the price for interest.

$4,864.65 divided by 24 = $202.69 per month + $50 per month for interest.

So he wrote 24 post-dated cheques in the amount of $253. each.

What interest rate is he paying?

Also, even if he pays the car off early, the agreement is the $1,200 financing charge stays no matter what.

How bad of a deal did he get?


About 22.5% APR if my calculations are correct, and that’s not allowing for the additional agreement with the finance charge. Pretty usurious!

Did he have alternatives? It’s easy to to claim usury, but if his options were worse or non existant, $50 for $202 a month may not be too bad. And the loaner is taking signifigant risk to someone who “actually doesn’t have any money”. I’m thinking he likely would not have gotten a loan from a bank (take note of the economy today), and thus would have no transportation to get a job. So, maybe it’s not a bad deal at all? Legitimate banks charge more than 25% for risk depending on their product. But percentages and dollar amounts are two different things. 25% on $200, although a large percentage, is small relative to the amount owed. 25% on $10,000 is another story.

So IMO, 25% for someone with no money on $4800 bucks is a good deal.

Really bad deal (depending on what state he’s in)!

CMC fnord!

22.5% for someone who has no cash or down payment and wants/needs to make a $ 4800 purchase is not all that of line given the relative risk of purchasing a rapidly depreciating asset (ie a used car) for someone who has no credit or poor credit (or assumedly he could have financed the car himself) across 4 years of payments. There are credit cards that charge more interest than that.

The risk factors for a lender are extremely high in that scenario. He’s lucky he found someone to do it at all. If a “friend” with bad credit/no credit came to you would you loan him $ 4800? Most people would find excuses to say “no” even if they could afford it. Interest is usually relative to risk. Your no credit friend owns his financier a huge debt of gratitude beyond the interest he’s paying.

Thanks for the replies everyone.

He is pretty happy with the arrangement.

To be fair, the mutual friend that loaned him the money, was also able to get the car at mostly a wholesale cost rather than retail, so even though his interest is 22.5%, it is also offset by him saving the purchaser an additional $1,000 or so off the car. (which this person would not have been able to do himself due to his lack of connections.)

Of course he signed a private contract stating the terms of the deal and giving the lender the right to collect the car should he default on the payments.

Myself, I don’t think I would risk my $4,800 for all the obvious reasons.
I think it has the extreme likelihood of tunring into one of those ‘lose-lose’ situations. (the guy screws you, or there are bad feelings because he thinks you are screwing him)

I think for the person in a certain situation, this is a good deal.