Understanding APR On Payday Loans

Posted by Clear And Fair on July 10th, 2019

This article can be found in full here on Clear And Fair's website.

APR stands for annual percentage rate and helps you to understand how much a loan would cost over the course of a year. However, because payday loans are a form of short term loan that’s usually paid back in 35 days or less (depending on the lender), APR becomes more complicated. Read our guide on understanding APR on payday loans so you’re fully equipped to find the best price and understand your loan.

Payday Loans and APR

If you’ve looked at payday loans, you might have already noticed that the APR seems particularly high in comparison to other loans that run over a longer period. Understanding both payday loans and how APR is calculated will help you understand why this is and how it should influence your decision when choosing a payday loan.

What is A Payday Loan?

A payday loan is a form of small, short term loan that’s designed to help you financially when unexpected costs arise before your next payday. They are for people who know that they’ll be able to pay back the money after they are next paid, but need to cover an unforeseen cost for which they didn’t budget.

Because of the nature of payday loans, you’ll borrow money for a period between 1-35 days (up to around a month), making them one of the shortest forms of loans.

What is APR?

APR stands for annual percentage rate. You’ll see it represented as a percentage which calculates the yearly amount that you’ll pay for a loan. It includes everything: both the interest on the loan and any other fees you have to pay.

The key thing to remember about APR is that it calculates the cost of a loan over a year. When a loan is longer than a year, the total cost is added up and divided to give you an average for each year. When a loan is shorter than a year, the cost is multiplied to represent what it would hypothetically be if it was a loan spread over a year.

APR On Payday Loans

If you’re considering a payday loan, you’ll have likely already begun to look into different options and have noticed that the APRs on payday loans (and other short term loans) are typically higher than on other kinds of financial products.

Short term loans are usually a more expensive way to borrow money than other loans, but they have the distinct advantage of offering fast cash which you pay back within a short period of time. This means that they might not be as costly as the APR could suggest at a glance.

This is because APRs are most commonly used to calculate the cost of longer term loans, such as paying for a car, a mortgage or a long term phone contract. Short term loans usually don’t last longer than a few months, and payday loans are rarely longer than a single month.

This means that APR may not be the most helpful way to calculate the cost of a payday loan. It represents how much that loan would cost over the course of a year, not the month (or less!) for which you’re borrowing the money.