Question

In: Finance

Payday loans are high-interest short-term loans, usually over a period of two weeks. One recurring political...

Payday loans are high-interest short-term loans, usually over a period of two weeks. One recurring political question is whether or not interest rates on such loans should be capped. Roughly speaking, those in favor of caps want to protect consumers from potentially harmful loans, while those against caps want to let the free market determine what the rate should be.

First, do you think there should be interest rate caps on payday loans or not? Defend your answer. Also, determine the interest that would be charged on a two-week $300 payday loan if the interest rate is 520%, and the interest is compounded at the end of the two weeks. Explain how you came to your answer. Finally, suppose a friend or family asked you how it could be possible that an annual interest rate is higher than 100%. Write out an explanation of what you might say to them.

Solutions

Expert Solution

Payday loan interest rates should be capped because people most impacted by these higher interest rates are the ones most vulnerable people of the society without any option. The way we have minimum wage to ensure that workers at lower levels are not exploited, the same way, a case can be made to cap the interest rate for payday loans. In addition to higher interest rate, there are exorbitant and exploitative finance charges and once the borrower enters into vicious cycle of non-payment and subsequent charges, there is no escape. These payday loans have ruined many lives and families and it’s high time to cap the interest rates.

Annual Interest rate = 520%

Interest charged on a two-week (14 days) loan = 520% X (14/365) = 19.95% or 20%

Hence, Interest Charged = 20% of $300 = $60

Annual interest rate can very well be higher than 100% and it all depends on the rate being charged and the frequency of compounding.

For example –

-              A 10% monthly interest rate without compounding amounts to 120% (12*10%) per annum which is above 100%

-              A 10% monthly interest rate with monthly compounding amounts to 214% (i.e. (1.1) ^12 – 1) per annum which is well above 100%


Related Solutions

Payday Loans.  As you saw, the interest rates on these loans can be extremely high and are...
Payday Loans.  As you saw, the interest rates on these loans can be extremely high and are even called predatory by some. Do you think such high interest loans are ethical? Why or why not?
A payday loan company charges 5.2 percent interest for a two-week period. What would be the...
A payday loan company charges 5.2 percent interest for a two-week period. What would be the annual interest rate from that company? An ATM with a service fee of $2 is used by a person 200 times in a year. What would be the future value in 10 years (use a 3 percent rate) of the annual amount paid in ATM fees?
Short term (one year) interest years over the next 6 years will be0.9, 1.7, 1.1,...
Short term (one year) interest years over the next 6 years will be 0.9, 1.7, 1.1, 2.6, 3.2, and 3.9. Using the expectations theory, what will be the interest rates on 5-year bonds?
Assume an economy where • One period is one year • The one year short term...
Assume an economy where • One period is one year • The one year short term interest rate from time n to time n + 1 is rn. • The rate evolves via a stochastic process: r0 = 0.02 rn+1 = Xrn ˜ P[X = 2k] = 1/3 for k ∈{−1,0,1}. (1) • Consider now a zero-coupon bond that matures in 3−years with common face and redemption value F = 100. • Compute B0, the value of this zero-coupon bond....
Define These Terms in Two Short Paragraph each. One Short Paragraph defining the term, and one...
Define These Terms in Two Short Paragraph each. One Short Paragraph defining the term, and one short paragraph using it in an example. The terms have to relate to international business. 1-Patriotism- 2-Colonialism- 3-Ethnocentric- 4-Acculturation- 5-Developed World- 6-Social Cohesion- 7-Microcredit Banking- 8-Protectionism- 9-Culture- 10-Globalization-
One short term goal and one long term goal and two interventions for the following nursing...
One short term goal and one long term goal and two interventions for the following nursing diagnosis: Disturbed sensory perception r/t schizophrenia aeb pt statement of "I hallucinate that I see my mom and dad, I wonder if they are still alive".
Suppose you are considering taking consumer loan from bank for one year. Usually, for short- term...
Suppose you are considering taking consumer loan from bank for one year. Usually, for short- term loans, the bank offers 8 percent interest that compounds annually. Your credit application has been viewed by a few banks and two of them replied; Bank ALFA offers you a loan at 8 percent annual rate-interest payment by the end of year, and Bank BETA offers a loan with the same annual interest rate, but interest payment is 2 percent by the end of...
Determine two goals (one short term and one long term) that you wish to achieve(you can...
Determine two goals (one short term and one long term) that you wish to achieve(you can make up fictional ones if you wish). Explain how you will achieve them and what length of time you estimate it will take for you to do so. What will be the biggest obstacle in your efforts to achieve these goals.
Answer one of the two questions please Investments can be long-term or short-term. If you are...
Answer one of the two questions please Investments can be long-term or short-term. If you are investing for the long term, how much do you think general news stories, news about the economy, and company-specific news stories should affect your investment choices? Explain your answer. Investors are often grouped into two categories, those investors who invest based on specific company information, known as “fundamental investors,” and those who pay more attention to market movements and factors based on general market...
Over the short term, which type of costs is indifferent to activity level changes? Select one:...
Over the short term, which type of costs is indifferent to activity level changes? Select one: A. Mixed costs B. Variable costs C. Step costs D. Fixed costs
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT