Calculate APR of a Payday Loan

What is the Annual Percentage Rate (APR) of a payday loan company that lends $938 and charges $5 in two weeks?

Choose one:

a) Approximately 10.23%

b) Approximately 255.63%

Answer:

The correct APR of this payday loan company is approximately 10.23%.

Are you curious to know the actual Annual Percentage Rate (APR) of a payday loan? Let's find out together!

The loan amount provided by the payday loan company is $938, and after two weeks, a charge of $5 is added. This brings the total repayment amount to $1,034.

To calculate the APR, we need to consider the total fees and the time period involved. By setting up the equation Loan Amount + Interest = Total Repayment Amount, we can determine the interest rate for a one-year period that results in the same total repayment amount.

After performing the calculations, we find that the APR of this loan is approximately 10.23%. This means that you would be charged an annual interest rate of around 10.23% if the loan were extended over a full year.

Understanding the APR of a loan is essential for making informed financial decisions. It helps you compare different loan options and choose the one that suits your needs and budget.