How does the APR work?
Posted on Thursday, September 10th, 2009 at 5:14 pm in General Payday Loan Tips, Helpful Payday Loan Info, Miscellaneous Cash Loan Info
There is a lot of confusion about what the APR (annualized percentage rate) on a cash advance or payday loan really means. Many consumers – and plenty of politicians too – believe cash advances to be excessively expensive loans that trap low-income borrowers into paying sky-high interest rates and sinking ever deeper into debt.
The truth is that a payday loan can actually be a great way to fund a financial emergency or bridge the occasional gap between paychecks, as long as you handle the loan sensibly and pay it back quickly. There are three basic things you need to know about APRs and cash advances:
1. How to work out the APR of a cash advance: This is a very simple calculation, yet it’s vital to master. The APR allows you to pitch the comparative cost of one loan against another on an apples-to-apples basis. Just convert the two-week fee that is standard in the cash advance industry into an annual figure by multiplying it by the number of periods (two-week segments) in a year (26). If your lender charges $15 per $100 for every two weeks, you multiply 15 by 26 to get 390. This is the annualized percentage rate of the loan – 390%. No matter how much you are borrowing, just remember to use the fee per $100, and you won’t go wrong.
2. Look at the both the short-term and long-term real costs: The short-term cost of the annualized percentage rate is the fee charged for each two-week standard loan term, which commonly ranges from $15 to $20 per $100 borrowed. For each additional period you keep the loan running, you’ll pay another round of fees. If you repay your cash advance quickly, your borrowing cost will be quite manageable. Long-term, an ongoing paycheck loan can prove to be very expensive, however. In an analysis of lender Advance America’s financials, investment bank Morgan Stanley found that 38.1% of its clients used 9 to 14 payday loans a year. These heavy borrowers undoubtedly had to pay more than a reasonable amount of interest on their loans, but one could also argue that they were using them in the wrong way.
3. Keep rolling over your cash advance, and you’ll feel the APR: If you extend your loan several times, or take out new payday loans frequently, the effect of the APR will become a heavy burden. Let’s say you get a paystub loan to cover a bill for your child’s medical treatment. You receive your regular pay, but you still can’t pay back the loan, so you extend it. Then another emergency arises and you have to use your next paycheck for that. Before you know it you’ve had to pay half a dozen sets of fees, and you’re stuck in a debt cycle.
The bottom line: The important thing to understand is that payday loans are meant to be short-term financing tools. Like any responsible financial transaction, knowledge is the key to success.
Related posts:
How it Works
Complete the short form.
We match you with a lender based on their requirements and direct you to their website.
The lender will then display loan rates, terms and conditions for your acceptance.
Cash is directly deposited to your bank account after approval.
Comments are closed.