Section 8.3 High-Interest Loans
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rates charged by pawnshops are much higher than those charged by banks or
credit unions. If the borrower pays back the loan and interest, the item is released
back to the borrower. If the borrower does not pay the loan back within a
specifi ed period of time, the pawnshop becomes the owner of the collateral and
can sell the item to earn back the money.
Pawnshops also buy items with the intent of reselling them. If you sell an
item to a pawnshop, you walk out the door with cash that does not have to be
repaid.
To determine the total amount to be paid back on a loan from a pawnshop,
use the following formula:
total payback amount = loan amount + amount of fees
Example 8-3C
See It
Veronica needs cash for an emergency, so she decided to take her electric
guitar to a pawnshop. The pawnbroker took the electric guitar as collateral and
gave Veronica $75. In 30 days, Veronica must pay 2% interest as well as 22% in
storage and handling fees in order to get her electric guitar back. How much will
Veronica pay back if she returns in 30 days to reclaim her electric guitar?
Strategy
Use the formula:
total payback amount = loan amount + amount of fees
Solution
Step 1: Determine the total rate for fees and interest. Add the interest rate to the
storage and handling fee rate.
total fee rate = interest rate + storage and handling rate
total fee rate = 2% + 22%
total fee rate = 24%
Step 2: Convert the total fee rate to a decimal by moving the decimal two places
to the left.
24% → 0.24
Step 3: Determine the amount of fees and interest. Multiply the loan amount by
the total fee rate.
amount of fees = loan amount × total fee rate
amount of fees = $75 × 0.24
amount of fees = $18