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.
Carrie Reeder is the owner of ABC Loan
Guide, an informational website about various types of loans.
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