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CMA Final · Strategic Financial Management · Digital Finance

A fintech lender in Pune offers a digital loan of Rs 1,00,000 for one year. It deducts a processing fee of 2% upfront, so the borrower receives Rs 98,000. The borrower repays Rs 1,12,000 in a single payment at the end of the year. What is the effective annual cost of the loan to the borrower, to the nearest 0.01%?

The effective annual cost is 14.29%. The borrower actually receives Rs 98,000 after the upfront fee but repays Rs 1,12,000, so the cost is Rs 14,000. Dividing by the net amount received of Rs 98,000 gives 14.29%.

  1. A12.00%
  2. B14.00%
  3. C14.29%Correct
  4. D12.24%

Explanation

Net amount received = 1,00,000 - 2,000 = 98,000. Cost = 1,12,000 - 98,000 = 14,000. Effective rate = 14,000/98,000 = 14.29%. Using 14,000 on 1,00,000 gives 14%, which wrongly uses the gross amount as the base.

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