Question

Access to Financing: PayDay loans are one form of financing that consumers can use when they have insufficent cash to pay bills. Borrowers often can't access other methods of financing, because of a poor credit score (credit card) or lack of homeownership (home equity loans). States often have laws to limit the amount that PayDay lenders can charge for these short-term loans. For example, the state of Alabama has a law that limits the finance charge or interest rate to 17.50% for a two-week loan of $100. In other words, if you borrow $100, you must pay back $117.50 two weeks later. If you can't pay it back in two weeks, the PayDay lender will let you borrow what you owe ($117.50 ; principal of $100 and interest of $17.50), again at the rate of 17.50% for a two week loan. You can keep doing this- tacking on interest to principal every two weeks- until you have sufficient funds to payback the loan in full.

A) What is the APR of the loan? A. 322.50% B. 10.75% C. 456.25% D. 225.50%

B) What is the EAR of the loan? A. 11% B. 6,593% C. 323% D. 10,767%

C) Suppose you can't pay back the loan for three months. How much will you owe at the end of three months? A. 559.33 B. 363.33 C. 117.50   D. 331.50

D) What is the 3 month interest rate that you end up paying? O A. 1.63% B. 17.50% O C. 10.75% OD. 11%

E) What if you plan on paying back the loan in 6 months when you get $500. How much will you owe by then? A. 789.78 B. 692.56 C. 559.33   D. 167.65

Answer 1