New Hampshire is giving payday lenders the gong as it rings in the
new year. A law that takes effect today caps the interest rate on small
loans at 36 percent a year, which the industry has said will put it out of
business.
1.6. EXERCISES 15
Payday lenders typically charge $20 per $100 for two-week loans backed
by the borrower’s car title or next paycheck. That amounts to 1.43 percent
interest per day, an annual rate of 521 percent.
The cap translates to a daily interest rate of about 0.1 percent, or total
interest charges of $1.38 — a dime a day — on a $100, two-week loan.
If a person takes a payday loan for $1,000 for 2 weeks, how much will they save in interest with the new cap ?
To calculate the amount of interest saved with the new cap, we need to compare the interest charges under the old rate and under the new rate.
Under the old rate, the interest charged is $20 per $100 for a two-week loan. Since the person is taking a $1,000 loan, the interest charged would be calculated as follows:
Interest charged = ($20 / $100) * $1,000 = $200
Under the new cap, the interest charged is capped at 36 percent per year. To calculate the interest for the two-week period, we need to determine the daily interest rate:
Daily interest rate = 36% / 365 days = 0.098%, rounded to 0.1%
Now, we can calculate the interest charged under the new rate for the two-week loan:
Interest charged = (0.1% * 14 days) * $1,000 = $1.40
To find the amount of interest saved, we subtract the new interest charges from the old interest charges:
Savings in interest = $200 - $1.40 = $198.60
Therefore, a person would save $198.60 in interest with the new cap on a $1,000 payday loan for two weeks.