When taking out a payday loan or any sort of loan the lender will state what the APR is on the loan you take but what does this really mean as many customers do not fully understand what APR. You will see APR on everyday things such as your bank statements, card statements and financial adverts.
An APR is an abbreviated term for Annual Percentage Rate, and technically is defined as a numeric representation of your interest rate in other words APR gives you an indication on how much money will need to be paid back in interest on top of your initial loan and generally the lower the APR the less that will need to be paid over a specified period. The APR is usually based on monthly interest.
Payday Loans Working In A Representative APR Environment
Payday loan lenders and instalment lenders have to state their APR terms as a representative APR. A representative APR is the interest rate based annually and by law and by the Financial Conduct Authority all payday loan lenders and instalment lenders need to state this in representative APR format. Sometimes you will see interest rates at about 2000% for these types of lenders but this rate includes the normal monthly APR times 12 months rolled into one rate and also includes potential fees if any incurred such as faster payment or late fees. If payday lenders were allowed to state the monthly APR then the interest fee would not look so shocking as the rate shown is annually not monthly. Here is an example of a typical loan –
A lender may loan you £100 for a 30 day period and typically there is a representative APR of 1221% so it may look like you have to pay back hundreds for this loan when in actual fact there is only £24 to pay on top of the loan as the rate is shown annually rather than monthly
All fees and charges will be clear to see when completing an application with a lender always read and understand the terms and the amount needed to be paid back before agreeing to any loan.
Comparing APR Rates To Get The Best Deal
APR’s are a great way to compare different loan lenders so when choosing a lender always check who has the best and lowest APR rate which mean’s the less that will need to be repaid and always remember that short term lenders state the rates as a representative APR based annually and may not be an accurate representation of what a loan will cost based over a one month cycle but always triple check with lenders to be sure what will be needed to repay.