Question

In the chapter, we saw the interest rates on payday loans can be extremely high and...

In the chapter, we saw the interest rates on payday loans can be extremely high and are even called predatory by some. Do you think such high interest loans are ethical? Why or why not?

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Answer #1

It is not wrong to consider payday loans as predatory. People do not have proper finance knowledge and opt for payday loans. Payday loans offer seemingly low rates like 5% but on an annual basis they are exuberant.
For example a 5% loan for 15 days pay day loan.
Effective annual rate:
periods =24 periods
=(1.05^24)-1=3.225-1=2.225 or 223% annually which is out of the roof for such seemingly small rate loan.

There may not be any wrongdoing in these loans ethically but since people do not understand the financial mathematics behind these loans, they may be unethical.

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