What is the true APR for a payday loan of $500 with a 12% interest rate for one month?

To determine the true Annual Percentage Rate (APR) for a payday loan of $500 with a 12% interest rate for one month, it's essential to understand how the APR is calculated. The interest for one month at a 12% interest rate means that the borrower will pay 12% of the loan amount within that month.

Firstly, for a $500 loan at 12% interest, the interest for one month would be calculated as follows:

Interest for one month = Loan Amount × Monthly Interest Rate

Interest for one month = $500 × 0.12 = $60

Now, this interest is paid back over just one month, but to express it as an annual percentage, we need to annualize it. Since there are 12 months in a year, we multiply the monthly interest amount by 12 to find the equivalent annual interest:

Annual Interest = Monthly Interest × 12

Annual Interest = $60 × 12 = $720

Next, we determine the APR by comparing the annual interest to the principal amount of the loan:

APR = (Annual Interest / Loan Amount) × 100

APR = ($720 / $500) × 100 = 144%

This calculation shows that although the monthly interest rate