APR on Payday Loans
Friday, 10 Jun 2011 - 07:50
Annual Percentage Rates (APR) can be confusing, and are the source of some controversy in the
payday loan industry. Loan companies have to show a representative APR, which is done by working out what the compound interest is on one year’s worth of repayments.
If a loan is designed to be repaid over four years, the APR would be one quarter of the overall repayments. However, if a loan is to be repaid over a very short amount of time, the APR can be multiplied as if it were taken out for a year.
This can be confusing, especially at first glance. Since
payday loans are designed to be repaid in full within around 28 days, using the same criteria to rate them as a multi-year loan can be very easy to misunderstand.
Judging purely by APR, a long term loan may look like it would be significantly cheaper, but when you actually look at the total repayment, the amounts may be closer than you expect. This is because short and long term loans were designed for different purposes.
A long term loan may be suitable for you, if you’re looking to pay back the loan over a long period of time. Because of the lower monthly payments, this may seem like a more attractive option. However, it is worth bearing in mind that your circumstances can change, and being tied into a long term payment scheme could end up being a difficult decision.
This is where
payday loans come in handy. Because they are designed to be paid back within a short amount of time, they are primarily a ‘quick fix’ solution to short-term cash flow problems. These can be attractive because with one simple payment, the loan is finished. It may be a higher payment as a result, but the overall amount isn’t that dissimilar.
Loans are usually obtained either in order treat yourself to something, rather than save for it, or to deal with a small crisis. Kitchen floods, MOT failures – these kinds of things call for
payday loans fast.
In other words, emergency loans can be looked at as a sticking plaster. They’re essentially financial first aid. Now, whether you prefer to slowly peel the plaster off, or get it all done in one go is down to you. Peeling off slowly may be less immediately painful, but it’s spreading out that pain bit by bit. Ripping it off may hurt for a moment, but then it’s over and done.
To an extent, the APR reflects that difference. However, because one is made to look lower than it is, and one is made to look higher than it is, it doesn’t immediately look like a fair comparison.
And this is why APRs can be confusing. They can make ripping off a plaster look like cutting off your hand. They may be the best comparison between loans at the moment, but APRs don’t necessarily make things that much clearer...
About PaydayBank : www.paydaybank.co.uk was established in 2005, and is one of the UK’s leading providers of short term financial solutions.