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Assignment
James wants to buy a flat screen television for his new apartment. He has saved $700, but still needs $500 more. The bank where he has a checking and savings account will loan him $500 at 12% annual interest using a 90-day promissory note. James also visited the PayDay Loan store to compare the cost of borrowing. The manager told James that he could borrow $500 at 12% for two weeks. If James needed more time to repay the loan he would be charged 16% on the balance due for each additional week. He wondered how much it would cost to pay the loan back in 12 weeks so he could compare the cost to the bank's lending rate. He recognized that 12 weeks is a few days less than 90 days.
1) Calculate the total cost (principal plus interest) for the 90-day promissory note from the bank?
2) How much will James pay if he gets the loan from the PayDay Loan store and pays the balance back in two weeks?
3) How much will it cost if James gets his loan from the PayDay Loan store and pays it back in 12 weeks (nearly 90 days)?
4) James wondered how PayDay Loan can stay in business unless its customers neglect to determine how much they owe before agreeing to borrow. What do you think?
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