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11 December, 06:02

Payday loans issued by banks are often referred to as "direct deposit advances." In early 2013, the average direct deposit advance charged $ 10 for a $ 100 advance and was due in 10 days. What is the effective annual rate on this type of loan?

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  1. 11 December, 07:17
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    Deposit advance charged $ 10 for a $ 100 advance and was due in 10 days.

    The first step in calculation:

    10 day rate = FV/PV - 1 = (100+10) / 100 - 1 = 0.1 or 10%

    FV - future value

    PV - present value

    The second step in calculation:

    annual rate = 10 days rate * 365/10 = 0.1 * 365/10 = 0.1*36.5

    =3.65 or 365%

    The third step:

    EAR = [1 + Quoted annual rate/Compounding period per year (n) ]^n - 1 =

    = (1+365%/36.5) ^36.5 - 1 = 31.42 = 3142%
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