When you compare a payday loan to a more traditional loan, you might be shocked by how high the APR on a payday loan looks. This is because APR based on annual measures of interest, so when it comes to a product like a payday loan which is often only used for a number of weeks, APR can become quite confusing. APR can also be confusing as a measurement of interest and it can be difficult to understand how much your loan is actually costing you. In this article we will cover everything you need to know about the APR on a payday loan.
What is APR?
APR is the only official way to measure the rates on financial products, that means all rates for loans and mortgages are presented in the form of APR. The majority of financial products our long-term which is why APR is such a good way of measuring. APR based on annual measures of interest, which makes it superb for comparing products like mortgages or 12-month loans. However, when it comes to a product like a payday loan which is often only used for a number of weeks, APR can become quite confusing.
The Consumer Financial Protection Bureau advises consumers to use APR to compare payday loans, helping borrowers to make informed choices about who they borrow from. The representative APR is the rate of interest that will be granted to at least 51% of successful customers. The APR will vary based on the duration of the loan.
Why is APR so high for payday loans?
It can prove difficult to get your head around the cost of a payday loan when you look at the APR. With some payday lenders charging 6,000%, it can become difficult to understand how much you will actually be paying to borrow the money you need.
The main reason why the APR on a payday loan appears to be so high is because APR is calculated at annual interest rate, whereas the majority of payday loans are only designed to be used for a few weeks. With a payday loan your APR is calculated by how much interest you will pay and is then multiplied as though you were paying off for a full year. This is where the APR for a payday loan can look so terrifying.
How can you find the real cost of a payday loan?
Although APR offers a good baseline when comparing and considering payday loans, there are other factors that can be a lot more useful in working out whether a payday loan is right for you. The cost per daily interest that lenders charge is a very clear indicator of the cost of a payday loan. This measurement will tell you exactly how much you will be paying each day to borrow the money you need. Another measurement to consider is the cost per $100 borrowed per month, this is an additional simple way to understand how much a loan will be costing you. Using either of these measurements you can easily workout how much your payday loan will be costing you.
It is also worth considering that when you apply for a payday loan with Finger Finance, the application process is completely free and if at point you wish to pay off your loan early Finger Finance will not charge you to do so.
Are Payday loans a good financial choice?
The answer to this question really depends on how much money you need to borrow, how long you need to borrow at for and what your personal financial situation looks like. A payday loan is only ever designed to be used as a measure to tide you over until your next paycheck. If you need to borrow a very large amount of money will you need to borrow money for a very long period of time, a payday loan will not be the most financially sensible choice for you. However if you have come up against a financial emergency and you need to borrow money quickly and easily, a payday loan could be the right choice for you. It is always important that you know no you can pay off your loan when you take it out, so take time to consider how much your loan is costing you and whether you can afford it.