Chapter 8 Loans
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that determine the minimum or maximum time for the terms of a payday loan. If
the fee is a percentage of the loan amount, the fee can be determined using the
following formula:
loan fee = loan amount × fee rate
The total cost of the loan, or the full amount that must be paid back at the
end of the term of the loan, is calculated using the following formula:
payback amount = loan amount + loan fee
Example 8-3A
See It
A payday loan company off ers a 14-day term loan. They charge 22% of the
principal as a brokerage fee and an additional 0.38% in interest charges. Greg
had an unexpected car repair and decided to obtain a payday loan for $150. How
much will Greg pay back at the end of the 14-day loan term?
Strategy
Use the formulas:
loan fee = loan amount × fee rate
payback amount = loan amount + loan fee
Solution
Step 1: Determine the total fee rate for the payday loan. Add the brokerage fee
and the interest rate.
fee rate = brokerage fee + interest rate
fee rate = 22% + 0.38%
fee rate = 22.38%
Step 2: Convert the fee rate to a decimal by moving the decimal two places to
the left.
22.38% → 0.2238
Step 3: Determine the loan fee. Multiply the loan amount by the fee rate.
loan fee = loan amount × fee rate
loan fee = $150 × 0.2238
loan fee = $33.57
fyi
Payday loans are
sometimes called
paycheck advances.