Payday loan. You borrow $500 to buy gifts for your children. In two weeks, you n

Question

Payday loan. You borrow $500 to buy gifts for your children. In two weeks, you need to pay $650. What would be your interest rate over that two week period, and what would your Annual Percentage Rate be for the year? How much profit would the PayDay Lender make in a year if they made that same loan with the same $500 every two weeks assuming 100% collections and money out on that original $500? If the lender had $100,000 in Capital for the entire year, and assuming 100% collections and fully loaned out, what would be the gross revenue for the lender?

Explanation / Answer

interest rate over that two week period = (650-500)/500 =150/500 = 30.00%

Assuming 1 year = 52 weeks,

In a year we have 52/2 = 26 periods

Annual Percentage Rate = 26*30% = 780%

Assuming interest payments are not reinvested

Profit = 500*780% = 3900

For 100000 capital, gives 2 week loans of 26 times , at 30% biweekly rate and 780% annual rate

Gross amount collected = 100000 + 100000 *780% = 100000 + 780000 = 880000

Profit = 880000 - 100000 = 780000

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