The Boston Globe on New Year's Day 2009 reported that a New Hampshire law will cap the interest rate on payday loans at 36 percent per year. Payday lenders typically chard $20 per $100 for two-week loans backed by the borrower's car title or next paycheck. That amounts to 1.43 percent interest per day, an annual rate of 521 percent. (R2671 The cap will limit the daily rate to about 0.1 percent, so just $1.38 - a dime a day - on that two week $100 loan. (a) What is a "payday loan"? (b) Verify the computation that 1.43% interest per day is 521% interest annually. (c) If the 1.43% interest is compounded daily then the true annual rate of interest is in fact much more than 521%. How much is it? (HINT: Start with the calculation (1 + 0.0143) 365 . The answer is hard to believe.) (d) Verify that paying interest of $1.38 on a two-week loan of $100 is just about a "dime a day" and corresponds to a daily interest rate of about a tenth of a percent. What annual rate does that represent? (e) Visit a payday loan website and report on what you discover there about interest rates.
The Boston Globe on New Year's Day 2009 reported that a New Hampshire law will cap the interest rate on payday loans at 36 percent per year. Payday lenders typically chard $20 per $100 for two-week loans backed by the borrower's car title or next paycheck. That amounts to 1.43 percent interest per day, an annual rate of 521 percent. (R2671 The cap will limit the daily rate to about 0.1 percent, so just $1.38 - a dime a day - on that two week $100 loan. (a) What is a "payday loan"? (b) Verify the computation that 1.43% interest per day is 521% interest annually. (c) If the 1.43% interest is compounded daily then the true annual rate of interest is in fact much more than 521%. How much is it? (HINT: Start with the calculation (1 + 0.0143) 365 . The answer is hard to believe.) (d) Verify that paying interest of $1.38 on a two-week loan of $100 is just about a "dime a day" and corresponds to a daily interest rate of about a tenth of a percent. What annual rate does that represent? (e) Visit a payday loan website and report on what you discover there about interest rates.
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter22: Providing And Obtaining Credit
Section: Chapter Questions
Problem 3P: Del Hawley, owner of Hawleys Hardware, is negotiating with First City Bank for a 1-year loan of...
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The Boston Globe on New Year's Day 2009 reported that a New Hampshire law will cap the interest rate on payday loans at 36 percent per year.
Payday lenders typically chard $20 per $100 for two-week loans backed by the borrower's car title or next paycheck. That amounts to 1.43 percent interest per day, an annual rate of 521 percent. (R2671
The cap will limit the daily rate to about 0.1 percent, so just $1.38 - a dime a day - on that two week $100 loan.
(a) What is a "payday loan"?
(b) Verify the computation that 1.43% interest per day is 521% interest annually.
(c) If the 1.43% interest is compounded daily then the true annual rate of interest is in fact much more than 521%. How much is it?
(HINT: Start with the calculation (1 + 0.0143) 365
. The answer is hard to believe.)
(d) Verify that paying interest of $1.38 on a two-week loan of $100 is just about a "dime a day" and corresponds to a daily interest rate of about a tenth of a percent. What annual rate does that represent?
(e) Visit a payday loan website and report on what you discover there about interest rates.
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