Question

Friendly’s Quick Loans, Inc., offers you $8.25 today but you must repay $10.45 when you get your paycheck in one week (or else). What is the effective annual return Friendly’s earns on this lending business? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Effective annual return 1,386.67 % If you were brave enough to ask, what APR would Friendly’s say you were paying? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Annual percentage rate

Answer 1

Answer:

1,386.67%

Explanation:

Loan Amount = $8.25

Repayment Amount = $10.45

Hence,

Interest for a week = Repayment Amount - Loan Amount

                                = $10.45 - $8.25

                                = $2.2

Interest percentage for a week:

= $\frac{Interest\ for\ a\ week}{Loan\ Amount}\times100$

= $\frac{2.2}{8.25}\times100$

= 26.66% (approx)

Number of weeks in a year = 52

Therefore,

Effective annual return:

=  Interest percentage for a week ×  Number of weeks in a year

= 26.66% × 52

= 1,386.67%

Hence,  effective annual return Friendly’s earns on this lending business is 1,386.67% .

APR you are paying 1,386.67%.