Payday Loans APR Explained

The APR (Annual Percentage Rate) of payday loans can sometimes lead people to be put off by this form of borrowing. Indeed, here at LoansAvailable.com you will see that the APR is over 1000%! Whilst this may be off putting for people who need to borrow money, it is not always a true representative of the cost of a payday loan.

Payday loans are typically paid off in between 30 and 31 days – APR actually means ‘Annual’ percentage rate which is equated to the interest calculated over one month. To give our customers more insight recent regulation has stipulated a representative example be demonstrated (you can find Loansavailable.com in the footer of very page of this website).

This gives a clear indication to the cost of the loan, repayment time and actual amount repaid.

A Simple Way of Understanding APR and its Relevance to Payday Loans

Do you really need a loan with a Representative APR amounting to 1000% + percent?

For an APR on 1737%, if you borrow £500 for 30 days, you will pay £625 at the end of the term of the loan.

The BIG question – Is this a BAD financial proposition or not?

What is Annual Percentage Rate?

The annual percentage rate or APR is the representative cost of a loan, which include interest and other related fees, expressed in its annualized equivalent. The APR of all regulated loans are disclosed prior to the approval of loan application in compliance with the applicable provisions of the UK Consumer Credit Act of 1974.

The APR is determined by considering the following:

• Actual interest rate of the loan
• Term of the loan
• Payment frequency
• Payment amount
• Other related fees

Don’t Get Lost in the APR Maze

APR is one BIG puzzle for many consumers. In a 2010 report by the Office of Fair Trading, it was noted that a significant number of loan borrowers find APR a misleading measure of the actual cost of a loan. Instead, most of them refer to the total repayment amount in determining their best loan options.

For the ordinary layman, a loan with an APR amounting to 1737 percent can be perceived to be extremely expensive and would cringe at the prospect of availing of such financing service. However, we have to remember the fact that even with a high APR the actual cost of the loan may not necessarily be high. And when we compare this option with the other alternatives, such as overdrawing of the current account or paying penalty fee for late payment, such loan option may come out cheaper.

Demystifying the APR of Payday Loans

A good way to understand the APR is by doing an “apple-to-apple” comparison between the APR of payday loans and the “typical” APR of some of our basic expense items. Thus, if we try to compute the “APR” of some of the specific expense items, we will get the following data:

Payday Loan APR – 1,737 percent
Car Rental “APR” – 89,280 percent
Budget Dinner “APR” – 2,546 percent
Car Rental “APR” – 20,460 percent

Thus, a straightforward cost comparison based on the data above would show that payday loan is a lot cheaper than your regular dinner!

Payday Loans and Taxi Journeys

We all understand that this transportation mode is fast, convenient and valuable for short term travel. However, you would not opt for this transportation mode for long distance travel as there are other alternatives that are “cheaper” than taking a taxi ride. In the same manner, consumers should remember that payday loans are convenient short term cash solution, but are not appropriate for long term cash requirements.

It would be totally illogical for you to take a taxi ride when traveling from London to Glasgow. A train or a plane can be a cheaper alternative. Still thousands of commuters in London find taxi service as an extremely useful and indispensable mode of transportation when moving from one location to another within the city centre. This same rule applies to payday loans!

If you have any questions relating to the payday loans APR then contact us