Calculate the annualized interest rate these companies are charging if the penalty is two percent a month. What if the penalty was two percent a week?

Question

According to an article in the Maclean’s magazine, “Cable, satellite and wireless companies may be
charging illegal late fees. Companies may calculate a compounded late-fee rate of two percent a month.
However, because they charge even if a customer is late by one week, that can mean an effective
annualized interest rate above the maximum allowed by the Criminal Code: 60 percent.” (Maclean’s
November 28, 2005, p.16.)

 

Calculate the annualized interest rate these companies are charging if the
penalty is two percent a month. What if the penalty was two percent a week?

Answer 1

Hi Harjit,

 

We can calculate the annual interest rate by multiplying the given interest rate by the appropriate number of periods per year in each case:

    Annual Interest Rate (R) at 2%/month:

        R = (0.02/month)(12 months / year) = 24%

    Annual Interest Rate (R) at 2%/week:

        R = (0.02/week)(52 weeks / year) = 104%

 

We can see that the monthly rate yields an annual rate of 24%, which is well within the legal maximum of 60%.  The same weekly rate yields an annual rate of 104%, which far exceeds that legal maximum.

 

Thanks for submitting this problem and glad to help.

 

God bless, Jordan.