Did you know the payday loan annual percentage rate (APR) is probably the most controversial thing about payday loans? Well this is the one thing the back-bench politicians focus on because they want to further their careers by starting another pointless crusade…
Let’s take a minute to really take a look at the thing they’re all moaning about.
What is payday loan APR?
An APR or “annual percentage rate” is basically the interest payable on the amount borrowed and other related charges.
Payday loan companies are compliantly obliged to display what’s known in the industry as a “representative APR” or “average APR” – essentially a rate that applies to at least 51% of succesfull loan applicants.
What is included in a payday loan APR?
- The interest you have to pay.
- The length of the payday loan agreement, timing and frequency of repayments, as well as the amount of each payment.
- Certain fees associated with the loan – such as administration costs.
An APR assumes the rate of charge over a 12 month period and therefore shows interest and fees as an annual rate and all lenders, regardless of whether they’re payday loan companies or banks are required by law to tell you what the APR is before signing what’s known as a consumer credit agreement.
So – what’s the problem with showing the APR for a payday loan? Well it’s not really representative… at least not in the same way as a standard bank loan.
A payday loan is a short-term solution that can be taken out for any financial emergency, unexpected bill or if you simply need a cash top-up before payday.
Payday loans tend to have a life-span of 1 month – hence why a 12 month APR doesn’t really apply to this form of lending.
If you think about it – a loan that you pay back after a month only requires a fraction of the 12 month APR displayed when you succesfully apply for a payday loan. For example, if you take out a Payday UK loan over a month then, for every £100 borrowed you only pay back around £25 in interest on top of the £100. Granted you’d be paying back £300 on top of the £100 you borrowed if you repaid this back over a year – but who in their right mind would want to do this anyway?! This is why payday loans have a bad reputation and why you see APRs of 1000%+.
So – ask yourself, if I need a small, quick loan are payday loans as bad as they say?