Calculate the interest rate on a payday loan

how do you calculate the interest rate on a payday loan,a payday loan generally refers to a short-term loan of $1,500 or less with a term of 62 days or less,normally when you borrow money save for using a credit card or for your mortgage, the interest rate you are being charged

is known. For example, if you were borrowing money to buy your first house at the beginning of 2015, you probably know you could get an interest rate of less than 3%, you might clearly know that your credit card provider charges a fixed annual interest rate of say 19 percent but payday loans are advertised a little differently. Instead of telling you the  rate first they tell you the dollar amount of borrowing for example it’s common to see ads that will say borrow three hundred dollars for two weeks for 69 dollars what you might not realize is that a cost of borrowing three hundred dollars for two weeks for 69 dollars is the equivalent of a five hundred ninety nine point six four percent interest rate. Here’s how to figure that rate out take the cost of borrowing sixty nine dollars and divide that by the amount borrowed three hundred dollars this

gives you the interest rate for the period of the loan, this simple interest rate is twenty three percent. now you have to convert that into a simple annual rate, payday loans are not allowed

to be compounded continually to do that, we have to figure out how many of these two-week periods fit into a year. Your first instinct is to think well, there are 52 weeks in a year so that’s 26 two week periods multiply 23 percent per two-week period by 26 to get 598 percent, but that’s not actually the exact formula used, non-leap years have 365 days but note that 52 weeks multiplied by seven days per week is three hundred and sixty four so the exact formula,requires using a more precise number to figure out how many two-week periods there are in a year we divide 365 days by 14 days to get 26 point zero seven one four we then multiply this by theinterest rate for two weeks of 23% to get a simple annual percentage rate of ninety nine point six four percent let’s see another example. let’s say you were borrowing two hundred dollars with a cost of borrowing of forty four dollars and you’re only borrowing for ten days, the rate for the period is forty four dollars divided by two hundred dollars or twenty two percent, the period is ten days to figure out the simple annual percentage rate we need to multiply 22 percent per ten days by the number of ten day periods in a year which is given by 365 days divided by ten days or

thirty six point five now we simply take, 22 percent and multiply by thirty six point five this gives us a simple annual percentage rate of eight hundred and three percent, so borrowing two hundred dollars for forty four dollars over ten days has an annual percentage rate of eight hundred and three percent and now you know how to calculate the annual Interest rate equivalent on a short-term

Leave a Reply

Your email address will not be published. Required fields are marked *