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.
Show Me An Example!
Of course! 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.
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.
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.
