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APR stands for Annual Percentage Rate, which is the interest you pay on your loan over the course of a year. This represents how much your loan costs you for 365 days, but APR is still used to express interest on loans that are taken out for less than a year. 


Key Points: 


  • APR stands for Annual Percentage Rate and refers to the interest applied to a loan over the course of a year. This is how much the loan will cost you, and represents how much you’ll need to pay back in addition to what you’ve borrowed.
  • The average APR on US payday loans is almost 400%.
  • 18 states cap APR on payday loans, such as Colorado which caps APR on payday loans at 36%.
  • Representative APR differs from regular APR. It shows what the average consumer will pay in interest, and won’t necessarily be the amount that you will need to pay. 
  • It is easy to calculate how much your interest payments will be using an online APR calculator. 

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 certain fees associated with a loan, credit card or mortgage.

The APR provides borrowers with a more accurate representation of the total cost of borrowing, allowing for easier comparison between different loan products.

Lenders are required by law in many countries, including the United States, to disclose the APR when advertising or offering credit.


Can You Give Me An Example? 


Sure! Let’s say you borrow $1,000 for two weeks. Two weeks is the average loan term on payday loans in the United States.

So, you automatically owe back what you borrowed: $1,000. 

Let’s say you live in a state, like Illinois or Washington D. C. which caps interest at 36%.  APR (interest for the whole year) would be 36% of $1,000, which is $360. 

Now, you are only borrowing for two weeks. That means you are only borrowing for 1/26th of the year, and therefore only owe 1/26th of $360. That is $13.85 in interest for two weeks. If you rollover that payment for another two weeks, then that interest doubles. Suddenly, you will owe $27.70 in interest. 


calculate interest

It is simple to calculate APR using an online APR calculator


What If I Need A Loan For Less Than A Year?


APR only demonstrates the cost of a loan for a year; it still helps you understand how much your loan will cost you if you are borrowing for less than a year. 

APR is calculated by dividing the amount of interest paid by the sum borrowed. To make this an annual rate, the figure is multiplied by 365. The outcome of this equation is divided by your repayment term, and multiplied by 100 to make it a percentage. The number you’re left with at this point is the APR.

This is illustrated in the example above. 


How Do I Find Out The APR On A Payday Loan?


US lenders’ loan advertisements must legally display what the APR on the loan is . This means that when you research different lenders and loans in your area, APR will be clear on lenders’ websites. You could also call them up and ask them about the APR rates attached to their loans.

Comparison websites provide useful guides such as side-by-side comparisons of loans explaining how much and how long you can borrow for and the APR attached to the loan you’re considering. 


Should I Want High Or Low APR?


The lower the APR, the less expensive the loan. Your aim, when borrowing, should be to make the cost of doing so as low as possible. 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, who try to attract users by offering them 0% APR on purchases and balance transfers for their first few months with the credit company.



How Much APR Can I Be Charged?


The average APR on a payday loan lies at 396%. Rates will vary between lenders, but will usually sit somewhere between the 390% to 780% mark. However, there has been a movement towards limiting APR to make borrowing less financially demanding and dangerous for borrowers. 

For many states, 36% has been the limit, with 18 states including New Hampshire, Montana and Colorado capping interest on payday loans at APR. Meanwhile, 13 states, including New York, have gone as far as to ban payday loans altogether. 


How Quickly Do I Need To Pay Back APR On A Payday Loan?


APR on payday loans are usually paid back very quickly. This means that the APR is concentrated even if the overall cost is the same. This is why payday loans famously have high APR attached to them, making loans very expensive for borrowers, with an average APR of around 400%. 

That is why you should only consider a payday loan if you truly need one. 


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


Many lenders use the term ‘representative APR,’ which is not quite the same as 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 will pay will be determined by your personal circumstances, such as your credit history, income, how much you’re borrowing for and how long you need a loan for. 


state law

Many states, such as D.C. have capped APR on payday loans.

What Happens If I Can’t Pay My Loan And APR Back On Time?


There are plenty of issues which may arise from not paying back your loan on time. For that reason, you should have a payment plan in mind before you sign your loan contract. 

It is essential to pay back your debts on time. Failing to do so could land you with the following issues:

  • Threatened legal action.
  • Damage to your credit score, making it difficult to secure future loans.
  • Further fees, making borrowing even more expensive.

If you have other concerns about late repayments on your payday loan, read our helpful guides such as whether a payday lender can repossess your house.