Consumer Math
Albert Einstein said “The most powerful force in the universe is…………compound interest.” Here’s a wonderful illustration of that fact.
I have a nephew who’s living life fast and furiously. Frankly, we’re worried that he might not make it past the ripe old age of 25. Like many young and disadvantaged members of society, and even some of us (like you and me) who find ourselves strapped for cash at times, we may occasionally need to make use of a “payday loan” service.
My nephew Lucas told me he was loaned $100 and told he would need to pay back $120 after seven days. That sounds reasonable, but is it? The $20 in interest makes it a 20/100 = 20% weekly interest rate, which is a 20% x 52 weeks = 1040% annual rate. I’ve heard of payday loan rates that are even higher than this!
Lucas ignored his loan for an entire year, taking on a “let them come after me” attitude. When the collectors finally got ahold of Lucas he was astounded what he owed. Using our compound interest formula, I’d like a couple of you to calculate what Luke owed (just to make sure this astounding, massive number is correct).
P=$100; r, the annual interest rate, is 1040% and is compounded weekly; the term is 1 year.
What does this amount owed tell about payday loans? Do you agree with many who would like to see these legitimate businesses outlawed, or are they providing a valid service to those who need short-term (and very high interest) loans?
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