Question

You get a payday loan. The lender charges you $9 per week for each $100 you borrow. Assuming you borrow $300 for 2 weeks, what APR will you be paying?

a) 18%

b) 24%

c) 36%

d) 42%

Answer 1

The annual percentage rate (APR) for a payday loan of $300 at $9 per week for each $100 borrowed is not 18%, 24%, 36%, or 42% as given in the options, but actually a much higher 468%.

Step-by-step explanation:

To calculate the annual percentage rate (APR) for a payday loan, we need to determine the total cost of the loan over a year and then express it as a percentage of the principal borrowed. In this case, $9 per week for each $100 means for $300, the weekly charge is $27 (since $9 x 3 = $27). Over two weeks, the total charge would be $54. To annualize this, consider there are 52 weeks in a year, so the total cost per year, without compounding, would be 52/2 (to convert the biweekly rate to a weekly rate) times the two-week charge, or 26 x $54 = $1,404. To find the APR, we then divide the annual cost by the amount borrowed, and multiply by 100 to get a percentage: ($1,404 / $300) x 100 = 468%. Therefore, all the provided options (a) 18%, (b) 24%, (c) 36%, and (d) 42% are incorrect; the actual APR is staggeringly high at 468%.