What a Loan with a 171.54% APR Looks Like

March 16, 2008

How to calculate APR using Microsoft Excel or a financial calculator.

I recently heard about a loan company that specializes in short-term loans. Here’s a typical example of a loan that this company offers:

Loan Amount: $1,250
Loan Term: 36 bi-weekly payments (72 weeks)
Payment Amount: $91.66
Total Payments: $3,299.76 ($91.66 × 36 = $3,299.76)
Total Interest: $2,049.76 ($3,299.76 – $1,250 = $2,049.76)

What’s the APR?


Now I’ll show you two ways to calculate the APR on this loan.

Here’s how the APR is calculated using a financial calculator:

N = 36
I/Y = ? (remember that you will need to change the P/Y to 26 since they are bi-weekly payments)
PV = $1,250
PMT = $91.66 (entered as a negative number)
FV = 0

Then you simply solve for I/Y by pressing the CPT button followed by the I/Y button. Your answer should be 171.54.

You can also calculate the APR with Excel, using the RATE formula and inputting the numbers like this:

Microsoft Excel RATE Function

You then need to multiply the answer (0.065977) by 26 to get the APR, which should be 1.7154 or 171.54%.

Now, here’s what an amortization schedule looks like for this loan:

High Interest Loan Amortization

It’s amazing to think that 90% of the first payment goes to pay interest!

One would have to either be desperate or uneducated to agree to these loan terms. Needless to say I won’t be advertising for this company.

7 responses to What a Loan with a 171.54% APR Looks Like

  1. My GOD! How can companies get away with charging that!

  2. Not to make a direct comparison, but I just calculated that 82% of my first mortgage payment went to interest. :(

  3. Jonathan,

    That doesn’t surprise me since a mortgage is such a long-term loan.

  4. From the title, I was expecting a picture of a payday loan “establishment.” Oh wait, they charge up to 10 times that…

  5. What is the effect on the percentage if one makes 1 extra payment per year (principal only)?

  6. skywalker, Cash Advance, Payday Loan and Check Cashing outfits get by with it everyday… In fact some guy at work just got one of those Payday loan things and was beaming about how much they “helped” him out and how good they were.. I couldnt help but cringe as he told us about it.

  7. How can they get away with this? Do they not have to adhere to predatory lending laws?