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I was talking with a friend about Payday loans (neither of us is getting one, just merely curious) and the APRs they state aren't really true. So, I was trying to figure out an APR based on the following criteria:

Loan amount: $100 "Finance Charge": $30 every payday. Loan starts paying back on 5th renewal, at 5% of the original balance.

So, the schedule of payments is: 30 (just fee) 30 (just fee) 30 (just fee) 30 (just fee) 35 (Fee of $30 plus $5 of principal) 33.5 (Fee of $28.5 plus $5 of principal) 32 (Fee of $27 plus $5 of principal) etc. 6.5 (Fee of $1.5 + $5 of principal)

The total paid is $535 for a 100 loan, over approximately 345 days.

What would be the APR? 534%? ($535/$100) * (345/365) / 100?

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Is the pay cycle every 2 weeks? So 30% each two week period is 1.3^26 = 917.33 or an APR of 91633%.

Loansharks charge less, I believe standard vig was 2%/week for good customers. Only 180% per year.

  • Yes, payday is every 2 weeks in this case. Very true about the loan sharks. But the late fees were a killer. – Matt Dawdy Jun 28 '12 at 18:47
  • Is 91,633% right, though? I've seen TILA statements from other people who HAVE taken payday loans, and the APRs stated there are anywhere from 300%-1000%, but not 91k%. Is that more of an EAR, as opposed to APR? – Matt Dawdy Jun 28 '12 at 19:01
  • I am open to others' thoughts on this, $30 on $100 in two weeks calculates to that number. Multiplying to get simple interest of 780% doesn't quite work, in my opinion. – JoeTaxpayer Jun 28 '12 at 19:09

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