Payday loans are very short-term loans that charge very high interest rates. You can borrow $600 today and repay $675 in two weeks. What is the compound annual rate implied by this 12.5 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 (2 weeks) and annualizing it. The calculation involves finding the effective annual rate for a 12.5% interest rate over a 2-week period, compounded weekly. Given the dramatic increase when compounded over 52 weeks/year, the CAR is significantly higher than the simple interest rate, leading to an answer of 2037.79 percent.

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