James wants to buy a 50-inch flat-screen television, and the model he wants costs $1,200. So far, 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 interesting using a 90-day promissory note. James also visited a loan store for a “pay day” loan to compare the cost of borrowing. The manager told James that he could borrow $500 for 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. H wondered how much it would cost to pay back the loan in 12 weeks so he could compare the cost to the bank’s lending rate (12 weeks is a few days less than 90 days).
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