Understanding APR and Your Payday Loan
The calculated Annual Percentage Rate (APR) of an online cash advance can seem a little intimidating the first time you see it, but understanding the way the APR is calculated can help to shed a little light on the reason the number is so high.
An annual percentage rate is a measure of how much interest you pay in a loan over the course of a period of time (one year). For a conventional loan such as a home loan or car loan, the annual percentage rate is an amortized amount that is shown by a single number (such as 7%), which tells you how much of the principal you will end up paying over the course of a year. For example, if you have taken out a car loan for $20,000 at 6% interest, on a base level, that means that in one year you will pay 6% of $20,000 - that's $1,200 - to the bank for the loan. This amount varies, of course, because you do not owe $20,000 at the end of the year, or even at the end of your first month because you have made payments, lowering that total amount. That is amortization. Regardless of the amortization, $1,200 per year is only $100 per month, or about $25 per week in order to borrow $20,000.
When it comes to online cash advances you do not take out a loan for an entire year, of course you don't borrow money for an entire year, you usually only borrow it for a few weeks. The cost of a payday loan is a flat fee that will be repaid with the principal amount of the loan with your next pay period and is usually around $10 to $25 per $100 you borrow. If you borrow $200 at $15 per $100, for example, you will be expected to repay $230 when the loan is due. That does not seem like a lot - $30, for what could be a finance-saving $200 loan, but if you calculate it as an APR, that $30 to borrow $200 becomes extremely high compared to our car example earlier when you were paying only $25 per week to borrow $20,000.
A Useful Tool
So while the calculated APR for an online cash advance may seem extreme as a single number - several hundred percent - since you are not borrowing the money for a full year, the actual burden to you is much smaller than that percentage would seem to indicate. Nevertheless it is important to prepare well and properly for your cash advance so that you can repay it without having to extend your repayment time and pay an additional fee which, over time can become a substantial burden.
