Question

Borrowing money has its benefits and risks. which loan has a high interest rate and what is one of its disadvantages?

A. loans have a very high interest rate.
B. in fact, the annual percentage rate (apr) of such loans can be as high as 400%.
C. they also have a(n) for customers who want to make delayed payments.

Answer 1

Short-term payday loans often carry high interest rates, reaching as high as 400% APR, leading to financial strain and risk of significant late fees. Banks also face risks related to asset-liability time mismatch, where the need to increase deposit rates could result in paying more to depositors than receiving from loan repayments.

Step-by-step explanation:

Loans with very high interest rates, such as those with an annual percentage rate (APR) that can reach as high as 400%, are often associated with short-term payday loans. One of the main disadvantages of such loans is the financial strain it causes borrowers due to the extremely high cost of borrowing. In case of delayed payments, these payday loans are also known to have significant fees or penalties, posing additional risks to the borrower.

Banks face a serious issue known as asset-liability time mismatch, where the bank's liabilities (customer deposits) can be withdrawn quickly, while assets (like loans) are repaid over a longer period. If a bank does not adjust deposit interest rates in response to rising market rates, it risks losing deposits to competitors offering higher returns.