The following Questions deal with payday loans. Assume the payday loan gets paid back in two weeks (1/26 of a year). At the end of two weeks, the borrower pays back the loan plus a fee.
-If the fee on a $200 loan is $20, what is the APR?
A) 20%
B) 260%
C) 300%
D) 340%

Question

Quizplus · Accepted Answer

The total amount paid back by the borrower is the loan amount ($200) plus the fee ($20), which is $220. To find the APR, we need to calculate the interest rate paid per year on this amount. Since the loan term is two weeks, we need to multiply the interest rate by 26 (the number of two-week periods in a year). The interest rate is calculated as the fee divided by the loan amount ($20/$200), which is 0.1 or 10%. Multiplying 10% by 26 gives an APR of 260%.

The Following Questions Deal with Payday Loans