Question

Determine the cost of a Payday loan. You had a rough few months. You fell behind on your mortgage and have been living paycheck to paycheck. You anticipate another rent payment of $1500 coming up very soon at the beginning of April and do not have the liquidity to pay it before your next paycheck on April 8th. You try a payday loan that is run by Corrupt Lending Corp. on April 1st. The payday loan charges a fee of $225 for advancing $1500 on your paycheck. You pay off your $1500 rent on April 3^th with the payday loan. You get paid on April 8^th, but another bill comes up! Your child broke his arm skateboarding and the hospital bill of $2500 is due April 8th. You must now delay repayment to the Corrupt lending Corp. for the payday loan that you took out. They charge you another $225 to delay repayment another pay period (2 weeks). You pay off your child’s hospital bill, but now your monthly credit cards and utilities of $2000 are due (April 23^rd). You defer the payday loan for another pay period (to May 6^th). Corrupt Lending Corp. charges you another $225 to delay repayment for another 2 weeks. You get paid and pay your credit card and utility bills, but then your spouse has an accident with the family car, and they need to have it fixed! You defer repayment to Corrupt Lending Corp. for payday loan again. They charge you another $225 to delay repayment. You finally get your yearly tax return in on May 30^th, of $3000 and repay the payday loan.  

a) How much money do pay to Corrupt Lending Corp. for the Payday loans?

b) How much interest would you have paid if you used your credit card for that duration of time, with a 22.99% APR instead of a payday loan?

Answer 1

Part a)

The loan principal is $1500. Loan start date was 3rd April & end date was 30th May. As the lender charges $225 for every 2 weeks, they charged 4 times during the loan period.

So total interest charged = 225*4 = 900

Thus $900 will be paid as interest charge in addition to $1500 principal , making a total of $2400

Part b)

For credit cards interest is calculated on daily basis, the calculations will be as shown below:

Thus the interest would have been only $54.83

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