Question

A check-cashing store is in the business of making personal loans to walk-up customers. The store makes only one-week loans at 8 percent interest per week

c.

The check-cashing store also makes one-month add-on interest loans at 8 percent discount interest per week. Thus if you borrow $100 for one month (four weeks),the interest will be ($100 × 1.084 ) − 100 = $36.05. Because this is discount interest, your net loan proceeds today will be $63.95. You must then repay the store $100 at the end of the month. To help you out, though, the store lets you pay off this $100 in installments of $25 per week. What is the APR of this loan? What is the EAR

Answer 1

By using the cash flows from the loan, we have PVA and the annuity payment, we need to find the interest rate
$63.95 = 25*(1-(1/(1+R)^4)/R)
Using the trial and error method we can calculate r
Assuming r = 21% we get
we get PVA = 63.51
Assuming r = 20.63 we get PVA = $ 63.95
APR = 52*(20.63%)				1072.90%
EAR = 1.2063^52 - 1				17225.30%

answered by: anonymous