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Key Points: 


  • APR is an acronym for Annual Percentage Rate. It refers to the interest applied to a loan over the course of a year. This is how much you have to pay back in addition to what you’ve borrowed, representing the cost of borrowing. 
  • APR on payday loans is notoriously high, with a US average of 396%. 
  • 18 states cap APR on payday loan at 36%. Colorado is one of these states. 


What Is APR?


APR stands for Annual Percentage Rate. It is a standardized measure used to express the cost of borrowing, including both the interest rate and any additional fees or charges associated with a loan or credit card.

The APR provides borrowers with a clearer understanding of the total cost of borrowing over a year, allowing for easier comparison between different loan offers. Lenders are required by law to disclose the APR to borrowers and it is important to note that the APR may vary depending on the type of loan or credit product.


An Example Of APR:


It’s much easier to understand APR and how much your loan will cost you once you have an example. For the sake of the example, let’s say you are the average borrower in the US. 

average borrower

The average borrower requests $375.

You needed a dental filling and the bill for that was $375. Your payday is in two weeks, and so can’t cover the cost right away, so you choose to apply for a payday loan. For argument’s sake, you live in Illinois, one of the 18 states which limit APR at 36%. 


Loan Amount: $375

Loan Term: 2 Weeks 

Loan APR: 36%

You immediately owe $375 back. That’s what you borrowed.

Then you also owe interest. Over 12 months you would owe 36% of $375 in APR. That’s $135 per year. But, you are only borrowing for 2 weeks, so we have to convert that annual cost to one that pertains to a two week loan. To do that, we divide it by 26 to reach $5.20. That’s the cost for two weeks.

If, like most, you roll your debt over for another couple of weeks, you pay that two week sum again. If you borrowed for the whole year, you would owe the total of $135 in addition to the $375, totalling $510 in payback.


APR is high on payday loans

You should be confident that you can afford repayments before committing to a loan.


Should I Want High Or Low APR?


The lower the APR, the cheaper the loan, and the better for you. It makes it more economical and less damaging to borrow. When you secure a loan with high APR, you are diverging from that aim. 

Sometimes lines of credit are available which offer 0% APR, typically during an introductory period. This is often the case with credit card companies such as American Express. These companies try to attract borrowers through offering  0% APR on purchases and balance transfers for their first few months with the credit company.


What’s The Difference Between Representative APR And Regular APR?


Many payday lenders often make use of the term ‘representative APR,’ which is different from regular APR. 

Representative APR represents what that lender’s average consumer will pay – hence the name ‘representative.’ This will not necessarily be the rate that you will pay. 

What you is impacted by your personal circumstances, including your credit history, income, how much you’re borrowing for and how long you need a loan for. 


I Can’t Afford My Repayments. How Does A Rollover Work?


When you are struggling to pay off your debts, you could get in touch with your loan provider and express that you’re having trouble paying back your loan. Many lenders will offer borrowers a rollover. 

A rollover is a new binding contract that gives you longer to pay off the originally agreed upon amount. It replaces the terms of your initial contract and should take a weight off of your shoulders. 

However, it’s important to understand that a rollover comes with additional costs. When you opt for a rollover, the lender will typically charge you additional fees and interest for extending the loan term. This means you will end up paying more in the long run.

Be sure to consider the implications of a rollover and assess whether it’s the best option for your financial situation. If you find yourself unable to afford your loan repayments, it’s recommended to take the following steps:

  1. Assess Your Budget: Review your income and expenses to determine if there are any areas where you can reduce spending or increase your income.
  2. Communicate with Your Lender: Contact your lender as soon as possible and explain your financial difficulties. Many lenders have hardship programs or alternative repayment options available for borrowers facing financial challenges.
  3. Seek Financial Assistance: Consider seeking help from nonprofit credit counseling agencies or financial advisors. They can provide guidance on managing your debts, negotiating with lenders, and developing a budgeting plan.
  4. Explore Debt Consolidation or Settlement: Depending on your overall financial situation, it may be beneficial to consolidate your debts into a single loan with more favorable terms or explore debt settlement options.


Does a Lower APR Mean a Better Loan?


Yes, in general, a lower APR indicates a more affordable loan. However, it’s important to consider other factors in addition to APR when evaluating loan options. While a lower APR is generally better, you should also consider the loan term, repayment terms and any other fees or charges associated with the loan.

For example, a loan with a lower APR may have a longer repayment term, resulting in higher overall interest paid over time. Therefore, it’s important to review the complete loan agreement and consider all aspects before determining which loan is the best fit for your needs.


Can the APR Change Over Time?


Yes in some cases the APR on certain loans can change over time. For example, adjustable-rate mortgages (ARMs) have variable APRs that can fluctuate with changes in market conditions.

These loans often have an initial fixed-rate period, followed by a variable-rate period. During the variable-rate period, the APR can change periodically based on a specified index, such as the U.S. Prime Rate.

However, many loans, such as personal loans, payday loans, no credit check loans, or fixed-rate mortgages, have a fixed APR that remains the same throughout the loan term.