PayDay Interest Rates Explained.
On the face of it Pay day loans have comparatively massive interest rates when compared alongside more traditional forms of lending. It is not uncommon to see APR values in the thousands of percent, but this said, it is worth understanding the way APR is calculate and the legal requirements that a lender has to adhere to get an understanding of the real costs.
APR Annual Percentage Rate
APR is a generic term used by lenders to provide an indication of the cost of a loan or borrowing. It is a legal requirement in the UK that lenders display a Typical APR rate (the rate that the majority of their customers receive) when they are offering a loan of credit facility.
The APR is calculated based on the interest you will pay over the period of a year. For example, if you borrowed £1000 over the period of a year from a bank with an APR of 5% you would pay back £1050 in total.
Let us also add in arrangement fees of £250 which is not uncommon, and you are now looking at a total repayable of £1300
Therefore for every £100 you pay back £130 however this loan can be advertised at 5% APR
When related to Payday loans you have to consider that the loan is over a much shorter period which can distort the perception of the APR. Payday Loans usually have a fixed repayment amount, for example, borrow £100 pay back £125 in 31 days.
So let’s take that £100 loan for a period of a month with a repayment of £125. As you can see you are actually paying less for borrowing that £100 however the APR that the payday loan company would have to advertise is 300% APR as they have to calculate that amount based on the annual calculation. |