Final answer:
To determine the annual interest rate for a one-month payday loan of $400 with a $35 charge, we calculate the monthly rate (8.75%) and multiply by 12 to get 105%, which is the annual rate. The correct answer is a.
Step-by-step explanation:
The student has asked how to calculate the equivalent annual interest rate for a payday loan that charges $35 for a one-month loan of $400. To find the annual interest rate, we first calculate the monthly interest rate and then extrapolate that to an annual rate.
The monthly interest rate can be found by dividing the interest amount by the principal amount:
Monthly Interest Rate = Interest / Principal
Monthly Interest Rate = $35 / $400
Monthly Interest Rate = 0.0875 or 8.75%
Since there are 12 months in a year, the annual interest rate is:
Annual Interest Rate = Monthly Interest Rate × 12
Annual Interest Rate = 8.75% × 12
Annual Interest Rate = 105%
Therefore, the equivalent annual interest rate for the payday loan is 105%, which is answer choice (a).