Question

You urgently need to borrow $5,000 for one month. You can get a loan from either a Jamaican bank that is charging 50% APR, or you can borrow the money from Vito Corleone on a five-for-six arrangement, i.e, for every $5 he gives you, you will repay him $6 one week later. Calculate the total interest you would need to repay the Jamaican bank and Vito Corleone. Which loan is better and why? (Be clear and concise and show all calculations for full credit.)

Answer 1

For Jamaican bank, APR = 50%, so the monthly interest rate will be 50/12 = 4.166%

so at the end of the month, total interest = 5000*0.041666= $208.33

For Vito Corleone:

If you borrow 5000 today, you will have to return 6000 after 1 week, so weekly interest rate = 20%

APR = 20*52 = 1040%, monthly interest rate = 1040/12= 86.6 hence interest at the end of the month - 5000*86.666%=$4333.33

Hence, you should borrow from the Jamaican bank as this loan is better.