Question

Friendly’s Quick Loans, Inc., offers you “seven for nine or I knock on your door.” This means you get $7.00 today and repay $9.00 when you get your paycheck in one week (or else). If you were brave enough to ask, what APR would Friendly’s say you were paying?

Answer 1

Answer: Friendly's would say that you were paying an APR of 1485.71%.

We arrive at the answer as follows

First we calculate the dollar interest on the $7 loan and the rate of interest.

$Dollar interest = 9 -7 = 2$

$\mathbf{Rate of interest on the loan = \frac{2}{7}*100 = 28.5714 percent}$

This 28.5714% interest is for a loan that lasts for one week.

Since a year has 52 weeks, we can find the APR as $\mathbf{28.5714 * 52 = 1485.71 percent}$.