(8) Predatory payday lenders such as MoneyTree and Check IntoCash exploit customers by advertising short-term loans for alending “fee.” In theory, a person can apply for a payday loan, andthen when they get paid two weeks later they repay the loan amountand the fee. However, the “fee” is actually an exorbitant interestrate, and most people end up making payments over a much longerperiod. It is common for people to pay several times the originalloan in just interest. The following examples use interest ratesfrom actual payday lenders in Lewiston.

(a) A $1000 payday loan from MoneyTree has a fee of $220. Thismeans that if you take out a $1000 payday loan, in two weeks youare required to pay back $1220. The $1220 is really just a largeone-time loan payment. Thus, the interest rate for 14 days is220/1000=0.22, or 22%. To figure out the actual annual percentagerate, determine how many 14-day periods are in one year, and thenmultiply that by 22%. What is the annual percentage rate for thisloan?

(b) Hopefully the previous problem convinced you how terriblepayday loans are. How- ever, there are some loans that are evenmore exploitive than payday loans. If you watch late night cableTV, there are often advertisements for lender. One lender that wasparticularly bad (and now shut down by the US Government) wasWestern Sky Financial (search Western Sky commercial on YouTube tosee if you remember it). They offered seven year loan for $5000 atan interest rate of 116.73%, com- pounded monthly. What is themonthly payment on this loan? What is the total amount that will bepaid back to the bank?

Answer rating: 100% (QA)

a What is the annual percentage rate for this loan 14 day ra... View the full answer