A person takes loan of Rs. 20,000 on the condition that he would pay it in the monthly instalment of Rs. 2,500. He has to pay interest @ 16% on the outstanding balances, then find out the average rate of interest received by the creditor per annum.

Monthly instalment = Rs. 2,500 Total loan = Rs. 20,000 ∴ Number of instalment = 20,000/2,500 = 8 Once the payment starts outstanding balances will go on diminishing. Hence, from point of view of interest, principal = 20,000 + 17,500 + 15,000 + 12,500 + 10,000 + 7,500 + 5,000 + 2,500 = Rs 90,000 ∴ Interest on Rs. 90,000 for 1 month at 16% p.a. = (90,000 × 16 × 1)/(100 × 12) = Rs. 1,200 Average rate of interest = (100 × I)/(P × T) T = 8 months = 8/12 year = (1200 × 100 × 12)/(20,000 × 8) = 9%