Question

Pete has the option of borrowing $380 for one week at an APR of 600% or borrowing the $380 for one week with a fee of $45. Which is the "better" deal?

Answer 1

APR = annual percentage rate.

Since Pete is borrowing the money for one week, the APR must be divided into a daily interest rate before we can figure out how much he'll pay for the loan.

There are 365 days in a year. Divide the APR by 365 to find the daily interest rate.

$\frac{600}{365} = 1.643$

The daily interest rate of the loan will be 1.643%.

The following equation is used to find the total interest payment:

$A = P(1+ \frac{r}{365})^{t} - P$

A represents the total amount paid in interest. P represents the amount borrowed for the loan. r represents the daily interest rate. t represents the amount of days the loan will last.

Plug in your values into the equation.

$P = 380, r = 1.643, t = 7$

$380(1+ \frac{1.643}{365})^{7} - 380 = 12.136$

Rounded to the nearest hundredths value, the total interest paid will be $12.14.

Compare the total amounts paid for both loans.

$12.14 < $45

The better deal is the loan with the 600% APR.

Answer 2

borrowing the $380 for one week at an APR of 600% since pete will owe more less interest this way than with the fees of $45