Payday loans are very short-term loans that charge very high interest rates. You can borrow $500 today and repay $550 in two weeks. What is the compound annual rate implied by this 10 percent rate charged for only two weeks?

Question

Quizplus · Accepted Answer

The compound annual rate (CAR) can be calculated using the formula for compound interest, taking into account the short duration of the loan (2 weeks) and annualizing it. Given the 10% interest for 2 weeks, the annual rate is much higher when compounded weekly over a year, leading to a CAR of approximately 1091.82%.

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