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You take a $1,000 post-dated check to a “PayDay” lender. The lender charges you a $10...

You take a $1,000 post-dated check to a “PayDay” lender. The lender charges you a $10 application fee and loans you $975. The check matures five (5) days after you allow the lender to possess it. What is the APR for this loan if you only use this service one time? What is the APR (and APY) if you use this service over and over such that you repeated 73 times in the year?

Solutions

Expert Solution

Answer: The APR (Annual Percentage Rate )  refers to the annual rate of interest charged to borrowers and paid to investors. APR is expressed as a percentage that represents the actual yearly cost of funds over the term of a loan.

Formula:

APR =

Interest=Total interest paid over life of the loan

Principal=Loan amount=975

n=Number of days in loan term

Given: Loan+Fees+Int = Amount

975+10+15=1000

Therefore, APR of one-time loan =

=187.17%

If we do for 73 times than APR=

=2.56%

And, APY ( Annual Percentage Yield)=

=

=2.52%

APY(Annual Percentage Yield) is the rate earned on an investment or loan in a year, taking into account the effects of compounding interest.

Difference between APR and APY are

APR is used in case of simple interest while APY in case of compound interest.

jeff jeffy answered 2 years ago
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