Understanding Payday Loans and APR

Payday loans have some of the highest annual percentage rates, or APRs, in the short-term loan market—some at 300% or more. Some consumers are concerned about these high rates, and often those in opposition to the payday loan industry use these numbers when explaining their anti-payday loan position.

The difficulty with using high APR as a negative argument is, that when looked at in context, it’s clear that it is not an accurate statement of a payday loan’s applicable fees.

An APR is the yearly cost incurred for borrowing money or being issued a line of credit, expressed as a percentage. APR can vary widely depending on the amount borrowed, the duration of the loan terms, the monthly interest rate and other fees that may or may not be included in the calculation.

In the case of a long-term loan such as an automotive loan, expressing the loan repayment in terms of APR is very useful. Without taking into account closing costs or other fees, a 10% APR lets the borrower know that he or she will pay a total of $10 of interest on every $100 borrowed every year. The lender can then calculate the monthly interest accrued on the total amount he or she borrowed and paint an accurate picture of monthly repayment.

In terms of payday loans, however, APR works differently. A payday loan is a short-term loan with one flat service fee charged when the loan is repaid. A payday loan is set up to last until the borrower’s next payday, which means the borrower is usually scheduled to repay the payday loan within two weeks. After the payday loan and fee are paid, there are no further charges or interest required by the payday lender unless the customer decides to take out an additional payday loan.

So if a payday loan lasts two weeks and charges the borrower only once, why are its applicable fees expressed in terms of one year? The use of APR to disclose fees and interest is required by federal law. The Truth in Lending Act (TILA) of 1968 was implemented to protect consumers by requiring all terms and conditions of loan or credit transactions be disclosed upfront. However, by complying with the TILA, payday loan fees are being translated to the consumer as ongoing interest rates instead of one-time charges. This leads to payday loan fees being presented as 300% and more.

For more information about payday loans and APR, visit < a href=”http://www.checkngo.com/?AfsCampaignID=637”>Checkngo.com. As a payday loan industry leader and founding member of the CFSA, Check ‘n Go is committed to increasing consumer awareness and promoting high ethical standards within in the payday loan industry.