Friendly’s Quick Loans, Inc., offers you $7.75 today but you must repay $9.85 wh

Question

Friendly’s Quick Loans, Inc., offers you $7.75 today but you must repay $9.85 when you get your paycheck in one week (or else).

What is the effective annual return Friendly’s earns on this lending business? (Round your answer as directed, but do not use rounded numbers in intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)

If you were brave enough to ask, what APR would Friendly’s say you were paying? (Round answer as directed, but do not use rounded numbers in intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)

Friendly’s Quick Loans, Inc., offers you $7.75 today but you must repay $9.85 when you get your paycheck in one week (or else).

Explanation / Answer

Weekly rate of interest = (amount of repayment – amount borrowed)/ Amount borrowed

                                                = ( 9.85 -7.75)/7.75

                                                = 0.27097

Effective annual rate = (1+ weekly rate)^(52) -1

                                          = (1+0.27097)^ (52) -1

                                           = 26003625.81 %

APR = Weekly rate x 52

        = 27.097 % x 52

         =1409.04%

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