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Payday loans are very short-term loans that charge very high interest rates. You can borrow $500...

Question:

Payday loans are very short-term loans that charge very high interest rates. You can borrow $500 today and repay $580 in two weeks. What is the compounded annual rate implied by this 16 percent rate charged for only two weeks? (Do not round intermediate calculations and round your final answer to 2 decimal places.)

Payday Loans Interest:

Payday loans offer loan against paycheck and the borrower has to pay back the loan is a short span of time (usually 1 of 2 weeks). While the interest amount may seem small, the effective interest rate runs into high figures due to small time period of loan.

Answer and Explanation:


The compounded annual rate implied is 4691.95%


We have 16% charged for 2 weeks.

2 weeks = 14 days.

Number of 2 weeks in a year = 365 / 14


He...

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Effective Annual Rate: Formula & Calculations

from Business 110: Business Math

Chapter 7 / Lesson 6
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