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Low Interest Payday Loan - How To Figure Out The Apr Of A Payday Loan
The annual percentage rate (APR) of a payday loan is a helpful
tool to compare rates of lenders. According to the "Truth in
Lending Act," passed by Congress, payday companies are to
provide you with the APR. Some companies list this information
on their site, while others only provide the fee amount and give
you the APR after you have submitted an application.
You can figure out the APR based on the fee amount by using the
following formula. This way you will have an accurate way to
compare costs, enabling you to find the best deal.
The Formula
Begin by multiplying the payday loan fee by the number of pay
periods in a year. So if a payday loan lender charges a fee
every two weeks, then there are 26 pay periods.
For our example, we will use a loan fee of $15 for every $100
borrowed. This is a typical rate, although you can find lower
rates for first time borrowers.
The formula looks like this:
15 (loan fee) x 26 (pay periods) = 390
The 390 equals the yearly charge for the loan. To find the
percentage rate, we will have to do one more step. Divide the
yearly charge by the loan amount, then times the total by 100 to
get the percent.
For instance, we will take 390 and times it by $100 since that
was our original loan amount. The formula is:
390 (yearly charge) x 100 (loan amount) = 3.9
3.9 x 100 (to get the percent) = 390% (APR)
What It Means
Payday loans give you a cash advance with the intention that you
will pay back the loan on your next payday. You will not be
paying $390 in finance fees for the year, only the $15 for the
pay period. However, if you roll over the loan, you will be
racking up the finance charges.
Cash advances are best used for temporary emergencies, like
covering a bounced check or car repairs. For longer term credit,
it is better to look at a credit card or personal loan. While
these types of loans will affect your credit score, they will
also provide better rates.
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