Payday loans
Financial products constitute a crucial component of an economy. Every production process completes when the end-user consumes the product. Hence, financial products must be determined based on the outcome. America has a diverse range of payday loan providers such as Cashfairy.com, power cash, and kwik Kash. The products have seen a surge over 20 years they’ve been in existence. However, the capitalists behind the business have overemphasized on commercial sustainability and forgotten the consumer side. It has been challenging to balance the equation because the financial providers’ goals are entirely inconsistent with those of consumers. Lenders aspire to meet business cost obligations, and consumers need fair interest rates (Oliver, 2014). This has compromised the payday loan segment because the sustainable interest rates are expensive to consumers. For instance, payday loan firms in rapid city allege that the interest rate cap chosen by voters is unstainable. This led to a business closure outcome. Though the firms argue to be a relief to borrowers who need cash for emergency purposes, the borrower’s cost has been extremely high (Holland, 2016). They are also guilty in terms of faulting financial regulation by charging pervasive fees and exorbitant interest rates. Therefore, the consumer should be protected via interest rate caps.
Mathematics
I = P (1 + r/n) ^ (nt) – P
I is the interest payable on due date
P is principal amount
r is the rate of interest
n is the no. of times I is compounded per unit time t
t is time loan is borrowed for or invested
P = $ 300
r = 520 %/5.2
n = 2 weeks
1 year is 365 days so 14 days =14/355*1 =0.0384 years
t = 2 weeks/0.0384 years
I = 300 (1 + 5.2/0.0384) ^ (0.0384*0.0384) – 300
I = 300 (1 + 135.4167) ^ 0.00147456 – 300
I = 300 (136.4167) ^ 0.00147456 – 300
I = 40925.01 ^ 0.00147456 – 300
I = 1.01578233 – 300
I = $ – 298.98422
How per annum interest rate can be greater than 100%?
I would answer by analyzing how the magnitude of due interest is arrived at
I = P (1 + r/n) ^ (nt) – P
Where I am the interest
From the formula, interest is a function of P, r, n, and t. So interest charges will be affected by the four variables. However, P, r, and t are constant since the lender gives them, but n varies depending on the number of compounding periods agreed upon by the lender and borrower. From the formula, we note a positive correlation between the number of compounding periods (n) and interest charged (I). This implies that an increase in compounding periods (n) leads to an increase in interest. Hence, the more the compounding periods, the more interest is added to the interest. The cumulative aspect makes it possible for the per annum interest rate to be higher than 100%.
In conclusion, borrowers must optimize interest charged by choosing minimal possible compounding periods (n). The lender optimizes by enticing maximum possible compounding periods.
References
Holland, J. (2016). Rapid City payday lenders stop making loans due to new lower interest rates. Rapid City Journal.
Oliver, J. (2014). Predatory lending: Last week tonight with John Oliver. HBO.