Should the APR be Used When Studying the Costs of Payday Loan Advances?
Most of the attention that is currentl focused on payday loans is not based around the fact that there are very few options for borrowers to obtain small loans at the moment. The media would much rather focus on the 'high interest rates' that payday loans attract.
However, are the media getting it wrong? When citing the payday loans companies for charging high amounts of interest, the media tend to use an APR. This is incorrect. An APR is used to describe a loan than lasts 12 months or more as it is a calculation of the interest charged per annum, hence the ‘annual’ in Annual Percentage Rate. Using an APR to illustrate the cosyt of a payday loan is a bit like being quoted a car hire charge of £14,6000 per annum when you ask for the daily rate. The real cost of the car hire, in this case £40, is not revealed to you in the annual quote and is therefore not much use to you.
This is what an APR does for a payday loan which is a short term loan. Payday Loan Advances are designed to be a short term borrowing solution lasting between 7 an 31 days. They are not designed to run for 12 months or more so therefore using an APR to describe the interest charged is totally misleading and gives a totally distorted view of the interest charged for the loan.
The majority of payday loan lenders make it very clear to borrowers what the charges are for borrowing the money, letting you know exactly what you need to pay back at the appointed time. This cannot be said for other types of borrowing, credit cards and particularly bank overdrafts where if an APR had to be shown would be in the millions.
On average, payday companies charge around £25 for every £100 that you borrow. This means that if you borrow £200 you will payback £250 if you pay it back at the appointed time. This means that the actual interst charged is 25%. No more and no less. There are no additional charges added to the loan inflating the charges. However, that 25% interest charge expressed as an APR becomes 1,737% because of the maths calculating the interest out over 12 months. As the loan runs for a maximum of 31 days, how can you apply an Annual Percentage Rate to the interest?
Apparently, the Office of Fair trading agree that this is misleading and confusing and in a recent inter report on short term lending stated that:-
“Consumers appear to find the inclusion of the total repayment amount more helpful than an APR in understanding the cost of short-term credit. This may be due to the information distortion which results when an APR is applied to low sums over short periods. ”
So if you are looking for a payday loan, when it comes to choosing a lender, forget about the APR and look more into what the lender is going to charge you for the amount that you wish to borrow.
Also, you need to understand that Payday cash advances are not intended for long term borrowing. If you think that you will not be able to repay the loan when it comes around to the appointed repayment time, then don't take out a payday loan. Find a more traditional form of longer term borrowing.
Tags: traditional form, car hire, annual percentage rate, distorted viewFiled under 28 by 
Comments on Should the APR be Used When Studying the Costs of Payday Loan Advances?
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APR = ANNUAL percentage rate. It is no good at describing short term loans like that. Legally they have to though.
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mike,
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-stephen
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