A financial company claims that it charges only 20% interest on loans. But if a person takes out a loan of 100 rupees, he would get only 80 rupees, after subtracting the annual interest of 20 rupees at the outset. And he has to pay back 100 rupees after one year. What is their actual rate of interest?

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Solution

If a person takes a loan of Rs.100, the financial company would give him Rs.80 after subtracting the interest of Rs.20.

Principal, P = Rs.80

Let the actual rate of interest be r%.

Amount after n years can be calculated using the formula

Amount after an year = Rs.100

Thus, the actual rate of interest is 25%.

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