If you have looked at taking out a short term, payday loan then you may have noticed that they are advertised with a particularly high APR. This is particularly noticeable when the loans are compared with larger loans such as mortgages.
Some payday loans lenders have higher APRs than others – visit http://www.paydayloansdirectlender.co.uk/ for a competitive rate.
So what is APR and why is it so high for payday loans?
APR is the Annual Percentage Rate that is put against a loan. This is the percentage of your loan amount which you, as the borrower, must pay back to the lender on top of the amount that you originally borrowed.
Payday loans are designed to be short term and this can go a long way to explaining why they are so high. Long term loans, such as mortgages, have low APR and the cost adds up over years. However a payday loan is not designed to be held over a long space of time. In theory, this “annual” amount which needs to be repaid to the lender should not be reached as the loan is only designed to be held for a couple of months.
Looking at a numerical example is a good way to see the differences in APR.
If you took out a loan over 10 years for £50,000 and the APR was 5%, you will repay 5% on top of your initial repayments each year. This will soon add up to several thousand pounds.
Payday loans are different. These specialist loans are designed to be smaller amounts which are then repaid quickly. As the name suggests, many people aim to repay these loans after their next payday.
If you were to borrow £500 at an APR of 2000% and repay this after 1 month, you would pay the lender £144 on top of your original loan. The total is not intended to keep adding up in the way that larger loans with low APRs do.
All loans and mortgages work with APRs and by law they must display them. There are often additional rates on top of this which should also be taken into consideration. None the less, this standardization makes it a lot easier to make comparisons between loans and mortgages from different providers. For mortgages it can help you break the payments down and assess how much you will be paying in APR each year. In relation to payday loans you can theoretically make comparisons based on daily charges.
You may see loan advertisements which use the phrase “Representative APR”. What is this? Representative APR can be seen as an estimate of the APR which will be charged. This can vary between customers and will be set in relation to factors such loan amount and loan duration. This means it is personalised to you and your loan so you may not get the same APR as shown by the representative example.