Question

EZ Pay Loans will lend you $100 today with repayment of $117.50 due in 1 month. Determine the effective rate of this loan.

Answer 1

Amount borrowed = $100
Amount repaid = $117.50
Period = 1 month

Monthly interest rate = (Amount repaid / Amount borrowed) - 1
Monthly interest rate = ($117.50 / $100.00) - 1
Monthly interest rate = 0.1750 or 17.50%

Effective annual rate = (1 + Monthly interest rate)^12 - 1
Effective annual rate = (1 + 0.1750)^12 - 1
Effective annual rate = 6.9256 - 1
Effective annual rate = 5.9256 or 592.56%

So, the effective rate of this loan is 592.56%