Some businesses called “car-title lenders” offer quick cash loans in exchange for holding the title to your car as collateral (you lose your car if you fail to pay off the loan). In many states, these lenders operate under pawnbroker laws that allow them to charge a fee that is a percentage of the unpaid balance. Suppose you need $2000 in cash, and a car-title lender offers you a loan at an interest rate of 2% per month plus a monthly fee of 20% of the unpaid balance. How much will you owe in interest and fees on your $2000 loan at the end of the first month? Suppose that you pay only the interest and fees each month. How much will you pay over the course of a full year? Suppose that you instead obtain a loan of $2000 from a bank with a term of 3 years and an APR of 10%. What are your monthly payments in that case? Compare these to the payments to the car-title lender.
Some businesses called “car-title lenders” offer quick cash loans in exchange for holding the title to your car as collateral (you lose your car if you fail to pay off the loan). In many states, these lenders operate under pawnbroker laws that allow them to charge a fee that is a percentage of the unpaid balance. Suppose you need $2000 in cash, and a car-title lender offers you a loan at an interest rate of 2% per month plus a monthly fee of 20% of the unpaid balance.
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How much will you owe in interest and fees on your $2000 loan at the end of the first month?
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Suppose that you pay only the interest and fees each month. How much will you pay over the course of a full year?
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Suppose that you instead obtain a loan of $2000 from a bank with a term of 3 years and an APR of 10%. What are your monthly payments in that case? Compare these to the payments to the car-title lender.
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