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The Importance of Payday Loans APR

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If you are planning on taking out a payday loan, it is very important that you know all about payday loans APR (Annual Percentage Rate).

If you are taking out a loan, and not just payday loans, be aware that you have the right to know the APR of their loans. Otherwise, fraudulent payday lenders will only take advantage of your ignorance. You might think that paying for this short-term payday lending on the next payday is cheaper than taking a longer-term loan. If so, you are definitely deceived.

What is Annual Percentage Rate?

The goal of APR or annual percentage rate is to simplify the borrowers’ understanding of how much it would cost him to take out a loan, like auto loan rates.

Before APR, terms on the loan were very complex and included a lot of numbers and finance charges that could easily overwhelm and intimidate the borrower. A lot of payday lenders did this to really confuse borrowers. Due to this problem, the Congress has developed APR as the standard measurement on how to calculate any loan’s interest rate or finance charge such as auto loan rates using the simplest method.

So today, comparing different payday loans, or any loans, is as easy as looking at the annual percentage rate. However, beware of some loan finance charges that seem like the payday loans APR. Many payday lenders are very tricky at making you believe that the finance charge they have is the APR, but it is just the rate of the loan that has to be paid on the next payday.

Credit Card Cash Advance VS Payday Loan

To better understand payday loans APR, you have to compare it with its closest competitor, which is the credit card cash advance.

Payday loans are short-term loans that have to be paid on the next pay day, while a credit card cash advance has longer terms and a high loan amount. The interest rate or finance charge of a credit card cash advance is often expressed in APR while the payday lending is not. The interest rates for payday loans are often expressed on just the interest rate or finance charge that has to be paid for the duration of the loan.

What happens is that the credit card cash advance has higher APR while the payday lending often has lower interest rate for the loan duration. If you want to get $500, the credit card cash advance offers this for 20% APR while the payday lending has 10% that has to be paid on the next payday. At first glance, it may seem like the payday lending is a better deal. However, you must do the math to reveal the real finance charge.

Credit Card Cash Advance:
($500 * 20%)/12         = $100/12
= $8.3

So for this loan, you only have to pay $8.30 if you will pay for it within the first month. It is divided by 12 because there are 12 months in one year and that APR is a yearly rate, not a monthly rate.

Payday Loan:
$500 * 10%                 = $50

With this, you will need to pay $50 on the next payday. You will pay $100 if you pay it after the next payday. That means that the payday loans APR on this is 240%. If the loan lasts for a year, you will pay a total of $1,200, which is more than twice the principal.

That is why knowing what is the payday loans APR is very important when deciding which payday lending to take. Do not just simply look at the numbers and assume that those are payday loan APRs. Make sure that the rates you are comparing are of the same measurement, like monthly rate and monthly rate or annual rate and annual rate.

How About Internet Payday Loan Sites or Online Payday Lenders?

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The Internet payday loan sites and online payday lenders make it easier for everyone to look for a loan and shop for as many loans as possible. Only by comparing loans by different payday lenders will you see which has the best offer. Again, never forget to look at the payday loans APR and not just the interest rate.

The Internet payday loan sites and online payday lenders are quite impressive at enticing everyone, especially those with immediate need for money, to apply for a loan. The payday lenders make the online process so quick that within the day, you can get your loan. Never become too excited and forget about being a wise loan shopper with these irresistible offers. Dig deeper into the loan details and see how much the loan’s worth by knowing the payday loans APR.

When Interest Rate is High

It is understandable that short-term loans like payday lending are at a high rate because you get the cash fast and you need to pay it back fast, usually on the next payday. However, the payday loans APR must never be too high. Check your state’s regulation on how much interest rate should be applied on the payday lending, even if it has to be paid on the next payday. A 15% interest rate is already high, but not for payday loans APR.

Again, comparing loans is the only way to know whether you are getting a good deal or not. Besides the payday loan APRs, you should still know more of the amounts that have to be paid for the loan. Add all of how much you will spend for the loan and consider that as the price of the loan.

Never be a gullible loan shopper. Being a wiser borrower starts from understanding why knowing the payday loans APR is very important.

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