Looking at APRs to compare payday loan offers is not a good idea. Before going into why this is so, it is perhaps best to take a brief look at what this often frighteningly large figures actually stand for.
Annual Percentage Rate
Put in simple terms, the APR, or Annual Percentage Rate, is a single percentage reflecting the total cost of any given loan over a full 12-month period. Taking not only interest, but all other potential costs (fees, etc.) into consideration, the APR on any loan may be variable or fixed. The rate will also vary depending on the loan duration and the lender.
Considered to provide consumers with a fairer, clearer way of comparing loans or other offers of credit, the law requires the APR to be shown by lenders on all types of loan, mortgage and credit card products.
It is the universal measurement to compare loans and financial products all over the UK and the world. APR includes administration fees and should not hide anything.
When looking at APRs, you will usually see this rate being referred to as the typical or representative APR. The typical APR is the rate offered to most borrowers taking out a specific loan. The law requires the typical APR to be offered to at least two thirds of the people applying for a particular loan. In other words, if three people apply for a loan with an APR of 23%, at least two of them must be offered this rate. The rate offered to the third person may differ depending on a selection of other factors, including the:
- Applicant’s credit history
- Amount to be borrowed
- Duration of the loan
While this makes it possible for lenders to tailor loans to individual circumstances, it does, however, mean that the rate you end up paying on your loan could vary significantly from the advertised typical APR. This, of course, means that while the advertised typical APR can provide you with a general idea of how much a loan will cost you, it should not be taken as a definitive rate.
Required by law to include the cost of potential extra services or products (like compulsory insurance, for example), the representative APR has to be prominently displayed on literature/ adverts promoting loans. It is also a legal requirement for this representative APR to be offered to a minimum of 51% of applicants for any particular loan. Because qualifying for the representative APR requires consumers to comply with a very specific set of criteria, many applicants find they are offered loans at much higher rates than the advertised representative rate.
APR and Payday Loans
The fact that the APR is an annual rate makes comparison between longer term loans (for periods of 12 months or above) against payday loans in the UK (which are typically taken out for a maximum of 30 days) somewhat inaccurate and misleading. A more accurate way of comparing how much a short term loan will cost you is to look at the daily interest rate or, to simplify things further, see how much a company will charge per £100 (in our case, this would be £24) borrowed over a period of 30 days.
Calculating your Cost
Uncle Buck advisors can help you to calculate the cost of a payday loan. Just give them a call on Tel.: 01959 543 400 (Call charges may vary depending on your phone provider. Calls may be monitored for security and/or training purposes).