Question

17) Determine the cost of a Payday loan. You had a rough few months. You fell behind on your mortgage and have been living paycheck to paycheck. You anticipate another rent payment of $1800 coming up very soon at the beginning of November and do not have the liquidity to pay it before your next paycheck on November 8th. You try a payday loan that is run by Corrupt Lending Corp. on November 1st. The payday loan charges a fee of $270 for $1800 advance on your pay. You pay off your $1800 rent on November 2^th with the payday loan. You gets paid $2000 on November 8^th, but another bill comes up! Your child broke his arm skate boarding and the hospital bill of $2500 is due November 8th. You must now delay repayment to the Corrupt lending Corp. for the payday loan. They charge you another $270 to delay repayment another pay period (2 weeks). You pay off your child’s hospital bill, but now your monthly credit cards and utilities of $2000 are due (November 23^rd). You defer the payday loan for another pay period (to December 6^th). Corrupt Lending Corp. charges you another $270 to delay repayment for another 2 weeks. You get paid and pays your credit card and utility bills, but then your spouse has an accident with the family car, and they need to have it fixed! You defers repayment to Corrupt Lending Corp. for payday loan again. They charge you another $270 to delay repayment. You finally gets your yearly bonus of $3000 and repays the payday loan.  

a) How much money do pay to Corrupt Lending Corp. for the Payday loans?

b) How much interest would you have paid if you used your credit card for that duration of time, with a 18.99% APR instead of a payday loan?

Answer 1

(a)

Amount paid to Corrupt Lending Corp. = amount borrowed + fees.

fees = $270 * 4 = $1080.

Amount paid to Corrupt Lending Corp. = $1800 + $1080 = $2880.

(b)

Total period of borrowing = 7 weeks (1st November to 2 weeks after 6th December).

Assuming 52 weeks in a year,

interest = amount borrowed * interest rate * (7/52)

interest = $1800 * 18.99% * (7/52) = $46.01.