Question

In: Finance

Josh needs $320 to pay off his cell phone. He can use his credit card, but...

Josh needs $320 to pay off his cell phone. He can use his credit card, but the $320 payment will put him at his card limit. His other option is to take out a payday loan. His credit card has an annual rate of 16.8% compounded daily. The payday loan charges a daily rate of 0.75%. Calculate the cost of both options if he will pay both off when he receives his next pay cheque in 3 weeks.

Solutions

Expert Solution

Payment = $320

a. Credit card annual rate compounded daily = 16.8%

Thus, effective annual rate = ((1+16.8%/365)^365)-1 = 18.29% per annum or 0.0501% per day (18.29%/365)

Interest cost if credit card is used = Total Payment including Interest for 3 weeks - $320

Total Payment including Interest for 3 weeks = $320*(1+0.0501%)^21 (3 weeks equals 21 days (3*7 days a week)

= ($320*1.010574) = $323.3837

Interest cost if credit card is used = $323.3837 - $320 = $3.3837 or $3.38

b. Payday loan interest = 0.75% daily

Total interest cost for 3 weeks or 21 days = $320*0.75%*21 = $50.4

Josh should avoid taking payday loan and instead use his credit card as the payday loan cost ($50.4) is significantly higher than the interest on credit card which is only $3.38.

Payday loans are short term unsecured loans which are provided at very high interest rates to meet short term financial obligations. In the given question, the interest rate of pay-day loan is 0.75% daily which is substantially higher than the 0.0501% interest charged on credit card and this leads to the higher cost for pay-day loans.

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

Credit Card Debt – How long will it take me to pay off my credit card...
Credit Card Debt – How long will it take me to pay off my credit card balance of $3,750? The credit card company is charging 10% interest. I can afford to pay $150/month, but would prefer to pay $100/month because I want to continue my cable service. Please show me the answer to both scenarios.
If you take the maximum length of time to pay off a credit card, at a...
If you take the maximum length of time to pay off a credit card, at a rate of 18.5%, how much interest will you pay in interest on a debt of $2,000?. Based your calculations on a minimum payment of 1/36 or $20, whichever is greater.
On Tuesday morning, Reggie discovered his credit card was not in his wallet. He realized he...
On Tuesday morning, Reggie discovered his credit card was not in his wallet. He realized he had not used it since the previous Thursday when he’d bought groceries. He checked his online credit card account register and saw that some $1,700 had been charged around the county on his card. He immediately notified his credit union of the lost card and unauthorized charges. For how much is Reggie liable?
Because of the relatively high interest rates, most consumers attempt to pay off their credit card...
Because of the relatively high interest rates, most consumers attempt to pay off their credit card bills promptly. However, this is not always possible. An analysis of the amount of interest paid monthly by a bank's Visa cardholders reveals that the amount is normally distributed with a mean of 30 dollars and a standard deviation of 9 dollars. A. What proportion of the bank's Visa cardholders pay more than 34 dollars in interest? B. What proportion of the bank's Visa...
Because of the relatively high interest rates, most consumers attempt to pay off their credit card...
Because of the relatively high interest rates, most consumers attempt to pay off their credit card bills promptly. However, this is not always possible. An analysis of the amount of interest paid monthly by a bank's Visa cardholders reveals that the amount is normally distributed with a mean of 28 dollars and a standard deviation of 9 dollars. A. What proportion of the bank's Visa cardholders pay more than 30 dollars in interest? Proportion = B. What proportion of the...
Because of the relatively high interest rates, most consumers attempt to pay off their credit card...
Because of the relatively high interest rates, most consumers attempt to pay off their credit card bills promptly. However, this is not always possible. An analysis of the amount of interest paid monthly by a bank's Visa cardholders reveals that the amount is normally distributed with a mean of 26 dollars and a standard deviation of 8 dollars. A. What proportion of the bank's Visa cardholders pay more than 29 dollars in interest? Proportion = B. What proportion of the...
Because of the relatively high interest rates, most consumers attempt to pay off their credit card...
Because of the relatively high interest rates, most consumers attempt to pay off their credit card bills promptly. However, this is not always possible. An analysis of the amount of interest paid monthly by a bank's Visa cardholders reveals that the amount is normally distributed with a mean of 30 dollars and a standard deviation of 7 dollars. A. What proportion of the bank's Visa cardholders pay more than 33 dollars in interest? Proportion = B. What proportion of the...
Because of the relatively high interest rates, most consumers attempt to pay off their credit card...
Because of the relatively high interest rates, most consumers attempt to pay off their credit card bills promptly. However, this is not always possible. An analysis of the amount of interest paid monthly by a bank's Visa cardholders reveals that the amount is normally distributed with a mean of 26 dollars and a standard deviation of 8 dollars. A. What proportion of the bank's Visa cardholders pay more than 28 dollars in interest? B. What proportion of the bank's Visa...
Because of the relatively high interest rates, most consumers attempt to pay off their credit card...
Because of the relatively high interest rates, most consumers attempt to pay off their credit card bills promptly. However, this is not always possible. An analysis of the amount of interest paid monthly by a bank’s Visa cardholders reveals that the amount is normally distributed with a mean of $27 and a standard deviation of $7. (a) What proportion of the bank’s Visa cardholders pay more than $30 in interest? (b) What proportion of the bank’s Visa cardholders pay more...
Debbie promises to pay Josh, her son, $15,000 if he obtains his degree at Middlesex University...
Debbie promises to pay Josh, her son, $15,000 if he obtains his degree at Middlesex University where he is currently in his second year. Josh graduates. Debby is:       not required to pay, because Josh was already at Middlesex.       not required to pay, because obtaining a degree benefits Josh.       required to pay because a job can be hard to find after college.       required to pay because Josh obtained a degree at Middlesex 7. Carla, a minor, buys...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT