Access to Financing: PayDay loans are one form of financing that consumers can use when they have insufficent cash to pay bills. Borrowers often can't access other methods of financing, because of a poor credit score (credit card) or lack of homeownership (home equity loans). States often have laws to limit the amount that PayDay lenders can charge for these short-term loans. For example, the state of Alabama has a law that limits the finance charge or interest rate to 17.50% for a two-week loan of $100. In other words, if you borrow $100, you must pay back $117.50 two weeks later. If you can't pay it back in two weeks, the Pay Day lender will let you borrow what you owe ($117.50 : principal of $100 and interest of $17.50), again at the rate of 17.50% for a two week loan. You can keep doing this, tacking on interest to principal every two weeks- until you have sufficient funds to payback the loan in full. A) What is the APR of the loan? A. 322.50% OB. 10.75% OC. 456.25% OD. 225.50% B) What is the EAR of the loan? O A. 6,593% OB. 10,767% O C. 11% OD. 323% C) Suppose you can't pay back the loan for three months. How much will you owe at the end of three months? O A. 363.33 O B. 331.50 O C. 117.50 D. 559.33 D) What is the 3 month interest rate that you end up paying? A. 11% OB. 17.50% O C. 1.63% OD. 10.75% E) What if you plan on paying back the loan in 6 months when you get $500. How much will you owe by then? O A. 167.65 OB. 789.78 C. 692.56 OD. 559.33 Access to Financing: PayDay loans are one form of financing that consumers can use when they have insufficent cash to pay bills. Borrowers often can't access other methods of financing, because of a poor credit score (credit card) or lack of homeownership (home equity loans). States often have laws to limit the amount that PayDay lenders can charge for these short-term loans. For example, the state of Alabama has a law that limits the finance charge or interest rate to 17.50% for a two-week loan of $100. In other words, if you borrow $100, you must pay back $117.50 two weeks later. If you can't pay it back in two weeks, the Pay Day lender will let you borrow what you owe ($117.50 : principal of $100 and interest of $17.50), again at the rate of 17.50% for a two week loan. You can keep doing this, tacking on interest to principal every two weeks- until you have sufficient funds to payback the loan in full. A) What is the APR of the loan? A. 322.50% OB. 10.75% OC. 456.25% OD. 225.50% B) What is the EAR of the loan? O A. 6,593% OB. 10,767% O C. 11% OD. 323% C) Suppose you can't pay back the loan for three months. How much will you owe at the end of three months? O A. 363.33 O B. 331.50 O C. 117.50 D. 559.33 D) What is the 3 month interest rate that you end up paying? A. 11% OB. 17.50% O C. 1.63% OD. 10.75% E) What if you plan on paying back the loan in 6 months when you get $500. How much will you owe by then? O A. 167.65 OB. 789.78 C. 692.56 OD. 559.33
