Question

To borrow​ money, you pawn your guitar. Based on the value of the​ guitar, the pawnbroker loans you ​$960. One month​ later, you get the guitar back by paying the pawnbroker ​$1170. What annual interest rate did you​ pay?

Answer 1

The money was paid at an annual interest of 261.42%

Explanation:

• The initial amount of the guitar when it was loaned was $960. After a month the guitar cost $1,170. This means that in one month the price went from $960 to $1,170.                                                                               Increase in cost = Difference between two costs = $1,170 - $960 = $210.
• To convert this into a percent we divide the difference in value by the original price and multiply the answer with 100 to convert it into a percentage.                                                                                                      % increase in cost = difference between two costs / original cost                                                                                           % increase in cost = ($210 / $960) * 100 = 0.21785 * 100 = 21.785%
• This 21.875% was the monthly interest that was paid. To convert it into annual interest rate we multiply it with the 12 months.
• Annual interest rate = monthly interest rate * 12 = 21.785% * 12 = 261.42%. This means if the guitar was loaned for a year, you would have to pay $3469.44.