Payday loans, cont. Imagine that you borrow $61 from a payday loan establishment. After one week, it
Question:
Payday loans, cont. Imagine that you borrow $61 from a payday loan establishment. After one week, it wants the principal plus 10 percent
interest back. But you will not have that kind of money; so, instead, you go
to another establishment and borrow the money you owe the first one. You
do this for one year. Interest rates do not change from one establishment to
another, or from one week to another.
(a) How much money will you owe at the end of the year?
(b) What is the total amount of interest that you will owe at the end of the
year, in dollar terms?
(c) What is the total amount of interest that you will owe at the end of the
year, expressed as a fraction of the principal?
(d) What does this tell you about the wisdom of taking out payday loans?
Foundations of Financial Management
ISBN: 978-1259024979
10th Canadian edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta