Question

Sidney took out payday loan for $1200 that charged $85 fee. If the loan matures in 2 weeks, what is approximate effective interest rate of the loan?

Answer 1

The amount owed increases by $85 in two weeks.

If the loan were "rolled over" at that point at the same interest rate, and this were done for a full year, the total amount owed would be
(1285/1200)^26 * $1200

If we subtract the original principle, $1200, and calculate the rest (the compounding interest) as a percentage of that principle, we get

[(1285/1200)^26 * $1200 - $1200] / $1200 = 493%