Follow Us on Facebook Follow Us on Twitter Follow Us on Google+ Follow Us on Pinterest Follow Us on Tumblr Visit our YouTube Channel Subscribe to our Feed Subscribe via FriendFeed

Connect With Us

The Truth Behind Payday Loans APR

by Jim ONeil on October 9, 2012

in Payday Loans News

When UK consumer explore personal loans bank offered, they see Annual Percentage Rates (APRs) of about six to 14 percent, depending on the amount borrowed, loan term, and their credit status. When they shop for payday loans, they see rates in the hundreds or thousands of percent. Why is there such a difference? Are payday lenders taking advantage of consumers who cannot get credit elsewhere, all the while making their financing more difficult to afford?

Quoting loans APR for payday financing is required by law but is very misleading. Payday loans are short-term financing, with terms typically no longer than one month. Using an annualized rate to describe the cost of this type of loan is not helpful to consumers because the high figure does not correlate with the actual cost of the loan. It is similar to quoting prices for food by the ton or gasoline prices per 1,000 miles driven. No one would shop at the market or fill up the gas tank if those were the only prices provided.

A more accurate cost figure for a payday loan is the fee per £100 borrowed, which is usually between £25 and £50. This figure is comprised of the loan processing, capital, and fixed labor costs. The last two components are the same for a small and a large loan. However, with a larger loan, lenders can charge a lower interest rate for a longer period and more easily cover their costs while still earning a profit.

The default rate for a short-term loan is usually higher, presenting greater risk for the lender. Therefore, the lender institutes a higher risk premium, increasing the cost of the loan. The natural result is higher loans APR for payday financing. This allows lenders to cover their expenses and also earn a profit so they can keep themselves in business.

Short-term financing can be an effective way to get cash needed quickly for unexpected reasons. Rather than paying late or not at all, people borrow the money and repay it when they receive their next paycheck. As long as they do not rely on this financing for daily living and they repay the loan within the stated term, the cost is not exorbitant.

Some lenders offer short-term, no credit check loans, which involve an even higher level of risk. The customer base for this financing includes people with low credit scores or damaged credit history. These individuals are often denied bank financing so the no credit check lender fills a need. However, it must charge more for this service due to the increased risk it is assuming. Only an unscrupulous lender would attempt to take financial advantage of the impaired credit status of a borrower.

Understanding the reason payday loans APR is so high makes this financing more palatable. After consumers break down the charges to a figure they can understand, they should use it to find the loans cheapest for them. Some lenders even permit early repayment, allowing borrowers to lower their interest payments.

Comments on this entry are closed.

Previous post:

Next post: