Payday loans Payday loan establishments offer short-term loans to be repaid on the borrower’s next payday. Fees fluctuate, but such an establishment may offer you $400 on the 15th of the month, provided you repay $480 two weeks later. Over the course of the two weeks, what is the interest rate (r) implicit in this offer?

In some US states, the number of payday loan establishments exceeds the number of Starbucks and McDonald’s locations combined. The answer to Exercise 8.5 suggests why. (See also Exercise 8.9.) We can extend the analysis over longer periods of time. Broadly speaking, there are two kinds of scenario that merit our attention. Here is the first.