Question

You take a $1,000 post-dated check to a “PayDay” lender. The lender charges you a $10 application fee and loans you $975. The check matures five (5) days after you allow the lender to possess it. What is the APR for this loan if you only use this service one time? What is the APR (and APY) if you use this service over and over such that you repeated 73 times in the year?

Answer 1

Sol :

To find APR (and APY) if you use this service over and over such that you repeated 73 times in the year is as follows,

APR

Net Proceeds = Loan amount - Application Fees

= $975 - $10 = $965

Interest Amount = Check Amount - Net Proceeds

= $1000 - $965 = $35

Check Maturity = 5 days

APR = Interest Amount/Net Proceeds x 365 days/Check Maturity x 100

= $35/$965 x 365 days/5 days x 100

= 264.77%

APY

Rate per Transaction = APR x Check Maturity/365 days

= 264.77% x 5/365

= 3.627%

APY = (1+Rate per Transaction)Number of transactions - 1

= (1+0.03627)73 - 1

= 13.4743 - 1

= 1247.43%

Therefore APR will be 264.77% and APY will be 1247.43%