“You must read the policies” is what everyone suggests when you talk about taking a payday loan. But sometimes, reading the policy might not be good enough. It’s also important to understand the APR.
While the APR is generally high, the actual amount is not. The 400% rate might sound scary, but when you do the proper calculations, the interest money is actually not a very big amount. So, how does APR actually work? Let’s find out.
What Is An Annual Percentage Rate (APR)?
APR stands for annual percentage rates. It represents the yearly cost of borrowing money, including interest and certain fees. APR helps you compare creditors or loan lenders more accurately.
As a borrower, you must look for lenders with low APR. Before confirming any e-transfer loans, compare 3-4 creditors. A lower APR reduces the total repayment amount.
Let’s say you have borrowed a payday loan amount of $300 with a 400% APR. So, you will be paying back significantly more than the original amount. This is why payday loans are often considered a debt cycle trap.
Some lenders may not clearly explain their APRs, so, for safety, calculate it yourself.
How Payday Loan Interest Rates Are Calculated?
As mentioned, you should calculate the APR yourself before taking a loan. This will save you from scams and frauds. To calculate an APR, you will need the following information:
- Loan amount
- Finance charges (fee), and
- Loan term (usually “days” for payday loans)
The formula you’ll be using is: (Fee/loan amount) ×(Loan Term365)×100
Using this simple and basic formula, you can find out the annual percentage rate. If you borrow a $500 payday loan and the lender asks for $15 per $100 borrowed for a 14-day loan, the interest rate for the loan will be:
- (75/500) ×(365/14)×100 = 391%
How Does APR Work for Payday Loans?
Now that you know how the APR is calculated let’s see how it actually works. If your creditor already tells you about the APR, then you can make an estimate of how much you’ll have to repay. This can help you make an informed decision about whether you will be able to return the money.
A 400% APR means payday loans are extremely expensive. The actual meaning of the terms is that if you borrowed the money for a year, the total cost would have been 4 times the amount you borrowed!
But since payday loans are short-term, the total amount is not so high. 400% APR on a $255 loan for 14 days will ask you for a payback of:
- 255 + (255/100 × 15 × 365/14) = 255 + 38.25 = $293.25
Why Is APR So High For Payday Loans?
While the APR for payday loans can appear high- often 400% or more, it’s important to understand this rate is annualized. You should remember that payday loans are short-term, usually lasting 14 days. This means the total cost isn’t as high as it seems.
For example, a $255 with a $45 fee would only need $293.25 to repay in 14 days. The 400% APR shows the cost of the loan lasts a whole year. It’s a high rate for a year, but not for just two weeks.
Payday loans can be affordable and manageable if you do the proper calculations. Also, compare fees before borrowing.
What Happens If You Can’t Repay Payday Loans?
The APR does not seem very high when you repay the loan on time. But when you fail to do so, the cost can quickly rise. Since payday loans are short-term, missing a payment can lead to rollovers. This means the lender extends the loan, but you’ll have to pay the same fee again.
For example, if you borrow $255 with a $45 fee and you can’t pay after 14 days, you’ll owe $293.25. If the loan is rolled over, you’ll have to pay that same $45 fee again. This makes the total repayment much higher.
With 400% APR, rolling over the loan can create a debt cycle. It’s best to repay on time or consider other options to avoid extra fees.
How To Secure A Payday Loan?
Securing a payday loan is a straightforward process. However, it’s important to understand the requirements before applying. Usually, lenders have simple criteria for approval, but you need to meet specific conditions. Here’s how to secure a loan:
- Check Eligibility: You must be at least 18 years old, have a steady income, and have a valid bank account. Lenders may also require proof of identification.
- Prepare Documentation: Gather your recent pay stubs, proof of address, and a government-issued ID to submit with your application.
- Choose a Lender: Research reputable payday lenders with clear terms, fees, and reviews to avoid hidden charges or unethical practices.
- Apply Online or In-Person: Complete an application, either online or at a physical location. You need to provide the necessary information like your income and bank details.
- Review Terms: Carefully read the loan agreement, including fees, repayment schedule, and APR, before agreeing to ensure you’re comfortable with the terms.
Frequently Asked Questions
What are good APR rates for loans?
Good APR rates for payday loans are typically high, often ranging from 300% to 400%. The actual rate depends on the lender and location. These loans are short-term and carry significant fees. It makes them expensive for borrowers, though you can get them easily.
What is the best alternative to a payday loan?
The best alternatives to payday loans include personal loans or payday alternative loans from credit unions. You can also borrow from family or friends or use a 0% APR credit card. These options offer lower interest rates and more manageable repayment terms. It helps avoid payday loan pitfalls.
Is taking a payday loan a good idea?
Taking a payday loan is often not a good idea due to high interest rates and fees. These loans can trap borrowers in a cycle of debt. You had better explore alternatives or calculate the APR properly to make an informed choice.
Can I get a payday loan with 0% APR?
It’s rare to find a payday loan with 0% APR. Payday loans typically come with very high interest rates, often exceeding 400% APR. For 0% APR, consider options like 0% APR credit cards or personal loans from credit unions.
Conclusion
In short, payday loan APRs are high. Consider alternatives, read policies, and calculate fees or APRs properly. Though the APR is high, as it’s short-term, you should consider and discuss if you can really afford it. Proper, thoughtful decisions will help you escape debt cycles.
