You have your eyes on a new automobile costing $25,000. If you wrote a check for the $25,000, you could drive off in your new car. However, you don’t have it and must finance $20,000 through the dealership at 15%/year/month over a 5-year period. The dealer then proceeds to add on a 1.25% loan initiation fee of $250. Also, they have a prepaid loan closeout fee of another $250. Then there is the paperwork filing and storage fee of another $100 and another prepaid loan maintenance fee of only $8/month or $480. At this point, they are speaking very fast and assure you that these little ‘‘required’’ amounts are routine and can be rolled into your loan. They figure your monthly payment for the $20,000 loan as A = $21,080 (A|P 1.25%,60) = $501.49.

1. What is the monthly rate of ‘‘interest’’ you are really paying for the $20,000 loan?

2. What is the nominal annual ‘‘interest’’ rate you are really paying for the $20,000 loan?