The APR Rate of Payday Loans gets a lot of bad press as the actual figure is high.
This is a very commonly asked question and one the press love to make into a much bigger deal than it actually is.
Payday loans are designed to be used for a very short time, a fraction of a year. Some companies only offer payday loans for 7 days! The usual time is 1 month max – 30 days.
Let us show you with an example :
If was to lend you £10 and asked you to repay it in 1 week with a 1% interest sum – You would pay £10.10 after the week.
If I charged 2% but did not require repayment for a year you would pay £10.20
The APR in the second example is 2% – the APR in the first example would run into the hundreds if not thousands of % APR, yet the actual cost of the loan is less.
When you are deciding whether or not to take out a payday loan, you need to only look at a few things:
1. How much do you have to repay in total? If you borrow £500 or $500, how much extra on top of the £500 or $500 do you have to repay?
2. How long do you have between borrowing the loan and repaying the loan?
3. Does your lender charge you anything else on top of the interest? Some charge you a bank transfer fee so you can have the money in your bank within 2 hours or even faster than that. By law this has to be incorporated into the APR % rate as it is an extra charge for borrowing the money.
4. What does the lender charge you if you are not able to repay the loan when you agree to? These extra charges can really add up. If you think you will have ANY problems repaying the loan when you agree to, the sooner you can call your lender the better so that they can work out a good solution for you.
The Annual Percentage Rate – APR rate – is a tool adopted to allow the customer to compare the true cost of borrowing from a variety of different providers who traditionally have offered different methods of repayment, over a much longer time period than offered by payday loan lenders.
The APR rate is calculated on how much a loan would cost you over a whole year.
So, if you borrow £100 or $100 for 30 days at a cost of £30 or $30, then after 1 month you will repay £130 or $130. This is high, lots of payday loans companies charge less than this at around £25 or $25 per £100 or $100 borrowed.
Taking the simplest possible calculation, if you have this loan on that same interest rate for 12 months instead of just one month, then you will be charged £30 x 12 = £360 / year. And this is ONLY interest.
£360 as a percentage of £100 is 360 / 100 = 3.6 x 100 = 360% APR.
However if you do not repay the loan for a full year then ALL of these charges are factored into the loan APR rate. So if you are 1 day late repaying your loan and a company charges £20 for this then that is added on to the APR rate. If they charge you £50 the next day, then by law this has to be factored in to the APR rate too.
So even if you repay the loan when you promise to and never have to pay these charges, by law they still have to be factored into the APR rate for that lender.
All you really need to know is how much will the loan cost you, and what are the charges for getting the loan and if you cannot repay on time. The APR rate is not an accurate figure to judge a payday loan by.