Payday loans are very short-term loans that charge very high interest rates. You can borrow $200 today and repay $250 in two weeks. What is the compound annual rate implied by this 25 percent rate charged for only two weeks?

Question

Quizplus · Accepted Answer

The compound annual rate (CAR) for a payday loan that charges 25% for two weeks can be calculated using the formula for compound interest, taking into account the number of compounding periods in a year. Given the short-term nature of the loan (two weeks), the annualization of the interest rate significantly increases it, leading to a very high CAR, which in this case is 32,987.22 percent. This reflects the exponential growth of interest due to frequent compounding over the year.

Payday Loans Are Very Short-Term Loans That Charge Very High