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A village moneylender charging 5% interest PER MONTH on a loan is effectively charging an annual rate of approximately:
A5% per year, the simple equivalent rate
B60% per year (5% multiplied by 12 months)
C12% per year, the bank's typical rate
D18% per year on most loans throughout
Answer & Solution
Correct answer: B. 60% per year (5% multiplied by 12 months)
5% per month compounded over 12 months ≈ 60% per year (simple) or 80% per year (compound). The chapter cites 5%/month = 60%/year as the moneylender norm vs banks at 10-12%/year.
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