APR stands for Annual Percentage Rate and APR tells you how much your loan is going to cost over a single year. However, APRs can be confusing, especially because payday loans are often repaid in less than 12 months.
Therefore, in this post, Dollar Hand is going to go through some frequently asked questions about APR so that you can find the right loan product.
- Annual Percentage Rate (APR) represents the cost of a loan over a single year.
- APR is calculated through a certain formula but because of hidden fees a lower APR does not always mean a cheaper loan!
- Most payday loans will range from anywhere between 390-780% APR.
- Representative APR shows the rate that more than half of the lender’s customers truly pay.
What Is APR?
The Annual Percentage Rate (APR) of a loan represents the cost of the loan over a single year. Borrowers can use the percentage rate to compare loan products from different lenders. The lower the APR, the less the interest will be.
What Is Your APR If You Are Borrowing For Less Than A Year?
The APR is a percentage, which is proportionate to the value that you’re borrowing. It works as an annual percentage, showing the cost of funds for one year, regardless of the duration of the loan.
The APR for a payday loan is calculated by dividing the amount of interest paid by the amount of money borrowed. Then, this figure is multiplied by 365 to represent the annual rate. Then, that figure is divided by the length of the repayment term and multiplied by 100.
This sounds complicated and it is! It can be difficult to understand APR but often finding the lowest APR for your credit card or loan will be the cheapest for you.
Is APR The Best Way To Understand If A Loan Is Too Expensive?
APR isn’t always the most helpful way to assess how much a payday loan will truly cost! The cost of your loan will depend on how much you borrow and how long you borrow for, as well as other factors.
Most importantly, do not get caught out by hidden fees! Remember that the lender can choose which fees are included or excluded in the APR. It’s vital to make sure you can afford the loan repayments. If you fail to pay, there may be late fees and added interest, making the loan more expensive.
How Do I Find Out The APR Of My Payday Loan?
In the United States, lenders are legally required to display the APR on any advertisements or marketing information for their products.
Therefore, it will always be easy to see what the APR of your payday loan will be. This allows you to easily compare between different lenders.
Is “Representative APR” The Same As APR?
The term ‘Representative APR’ is often used by payday lenders. It is important to note this is not the same as the APR shown when you are originally offered the loan.
The representative APR is the rate that more than half of their customers actually pay. It allows consumers to see what the payday loan costs the average customer. You can use representative APR as a basic measure of how expensive a lender is.
What Is The Maximum APR?
Shorter-term loans typically incur high APRs. These can range from anywhere between 390-780% APR. Many states in the USA have APR caps in place but Native American lenders and states without a cap, can have exceptionally high rates.
Why Is The APR For Payday Loans So high?
Payday loans are most often repaid over a much shorter term than traditional loans. This condenses the APR rate even if the cost is the same.
As a result, payday loans are renowned for having one of the highest APR rates. By contrast, APRs on credit cards can range from between 12% to about 30%.