Payday loans offer fast cash, but they also come with a price for the added convenience. When you take out a loan, you’ll come across the term APR, and you might not know exactly what it means. Payday loan APR helps you learn about the loan charges, but it can be misguiding. Before borrowing any loan, it’s better to have a clear understanding of how to calculate the APR.
What Does APR Mean?
APR stands for annual percentage rate. It informs you about the cost of borrowing for one year, inclusive of interest charges and additional fees associated with a loan. APR is the “monetary value” of a loan, cited in terms of an interest rate.
Once you learn what costs you will incur while borrowing, you can analyze the loans by comparing the APR.
Making the Payday Loan APR Calculation
There’s a simple formula to follow when calculating the interest rate or APR for a payday loan. The three pieces of information you need include:
- The amount of money you need, also known as the principal
- The amount of the finance charge or interest
- How long you will need to repay the loan
Once you have this basic information, you can calculate what your APR will be. An APR attached to a payday loan is one of the simplest to determine when compared to a mortgage APR or an APR that is attached to any other type of loan.
Here are the steps of APR Calculation:
Divide the finance charge or interest by the loan amount. If you want to borrow $400 and your finance charge is 0.2 or $20 for every hundred borrowed, you would end up with 20% (basically 20 cents for every dollar).
The next step is to multiply 0.2 by 365 (the number of days in the year). The answer is 73.
Divide the result by the term of the payday loan. If you repay in 2 weeks, you would divide 73 by 14 days. The answer is 5.214285.
Multiply the result by 100 to get a percentage. Here the APR would be 521.43%.
Part of the reason a payday loan APR is higher than a conventional loan is due to the risk assumed by the lender. The facts are simple and basic. If you need money fast and a payday loan is your only option. It will also be the most convenient option. The funds are dispersed in 24 to 48 hours which makes it readily available when you need it. By paying early or on time, you can actually reduce the amount of the finance charge. Payday loans aren’t meant to be a long-term loan. The sooner you pay it off, the lower your fees will be.