Assume you borrow $100 from a payday lender. The terms are that you must pay a fee of $25 in advance (today) and one year from now you need to repay $112. What implied interest rate are you paying?
A) 12.00 percent
B) 25.00 percent
C) 49.33 percent
D) 86.99 percent

Question

Quizplus · Accepted Answer

The effective interest rate can be calculated by considering the actual amount borrowed and the total amount to be repaid. After paying a $25 fee upfront, you effectively borrow $75 ($100 - $25). One year later, you repay $112. The interest paid is $112 - $75 = $37. The interest rate is $37/$75 = 49.33%.

Assume You Borrow $100 from a Payday Lender