SOLUTION: A payday loan company charges a $25 fee for a $500 payday loan that will be repaid in 14 days. Treating the fee as interest paid, what is the equivalent annual interest rate?

Algebra ->  Finance -> SOLUTION: A payday loan company charges a $25 fee for a $500 payday loan that will be repaid in 14 days. Treating the fee as interest paid, what is the equivalent annual interest rate?      Log On


   

Question 1121810: A payday loan company charges a $25 fee for a $500 payday loan that will be repaid in 14 days.
Treating the fee as interest paid, what is the equivalent annual interest rate?
Answer by Theo(13342) About Me  (Show Source):
You can put this solution on YOUR website!
the loan is 500 dollars and has to be paid back in 14 days.
the fee is 25 dollars.

if this is a simple interest loan, then the interest rate would be calculated using the following formula.

25 = 500 * r * n

25 is the interest
500 is the principal
r is the interest rate per day.
n is the number of days.

since n = 14, the formula becomes 25 = 500 * r * 14.

solve for r to get r = 25 / 500 / 14 = .0035714286 per day.

if there are 365 days in a year, then the interest rate for the whole year would be .0035714286 * 365 = 1.203571429, or 120.36% rounded to 2 decimal places.