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

To calculate the compound annual rate implied by this 12.5 percent rate charged for only two weeks, we first need to convert the two-week rate to an annual rate.

There are approximately 26 two-week periods in a year, so the annual interest rate implied by charging 12.5 percent every two weeks is:

(1 + 0.125)^26 - 1 = 2037.71 percent

Therefore, the compound annual rate implied by this payday loan is 2037.71 percent.

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