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APR is a term and number that tells you how much your loan is going to cost you for one year. APR stands for annual percentage rate. It can get confusing because even though APRs are calculated over one year, payday loans from Funding Zest are usually repaid in under a year. So, What Makes Payday Loan APRs Expensive? We’re going to tell you…


Key Points: 

  • Payday loans have very high Annual Percentage Rates (APR). These can go up to 600%. So, make sure you can afford to repay your loan. 
  • In 2021, the average loan was $375, paid back in two weeks. 
  • Payday loans are meant for short-term emergency use, not for a shopping spree.
  • If you can’t repay your payday loan, your credit score will be hurt making it difficult for borrowing in the future.
  • Many states allow only one payday loan at a time
  • Before you apply you want to make sure you’re eligible. To be eligible includes having an active checking account, being an American resident, and being over 18 years of age


What Exactly is an APR?

If you’ve read up on payday loans, you know that they’re meant for emergency funding. Usually, they last for about two to four weeks. They’re meant to tide you over until your next paycheck. 

So how does APR apply for that? Okay, let’s back up. APR is a percentage of what you’re borrowing. Again, it stands for borrowing fees over a year or the cost of the funds that you’ve gotten over 12 months – regardless of how long the loan will run. 

When you’re calculating what the APR is for a payday loan, you take the amount of interest that you will pay or have paid and divide it by how much you borrowed. Then you multiply that figure by 365 to represent 365 days in a year. And that gives you the annual rate. That’s what makes payday loan APRs expensive.

Except that there’s one more step. That figure is then divided by how long the repayment term is multiplied by 100. Are you still with me? 


So Should I Be Using APR To Figure Out If This Loan Is Too Expensive For Me? 

Good question. APR can be helpful, but assessing how much a payday loan costs you in total isn’t always as helpful. Think about the interest rate over a shorter period. That can be more practical, for example.

Say you borrow $100. Now check how much that costs for a week. Yes, using APR, the cost of your loan always depends on how long you’ve borrowed it for and how much you borrowed. There are other factors involved as well. So there are hidden fees. Your lender can choose which fees they include, or leave out in the APR. 


Have a Plan of How You Will Repay Your Payday Loan

It’s important to make sure you know what these hidden fees could be and have a plan to repay your loan.  When you don’t repay your loan, there can be fees for being late and there can be additional interest on top of that. This in turn can impact your credit score and you may have difficulty getting loans in the future. 


Want To Figure Out The APR of a Particular Payday Loan?

In the US there’s a group called the FRB or the Financial Reserve Board. They are the regulators for all lenders, at least the reputable ones. Those lenders have to show the APR on any ads or information marketing their products. This is great news because that means as a borrower you can easily compare the loans from different lenders of different types and different varieties. 


I’ve Seen ‘Representative APR’ – Is That The Same as APR? 

Some payday lenders use the term representative APR, but it is not equal to APR. Representative APR is meant to give you the borrower an idea of what the lender’s average customer could be paying or has been paying. 

So when you see the term ‘representative APR’ in a lender’s advertisements that rate must represent more than half of the customers who have used that lender. Remember that borrowers are offered different rates. It fluctuates because of their circumstances and the requirements that they need to put forth to receive their payday loan. So while ‘representative APR’ is not the same as APR, you can use it as a basic measure to compare lenders and how expensive they may be. 


What Does Maximum APR Mean? 

We’ve talked about shorter term loans, and their APRs are typically higher, ranging from around 390% to 780%. APRs can differ from state to state. Your state may have a different cap on the APR in place. On the flip side, you could be in a state without a cap, and then it’s not uncommon to see extremely high rates. 

Keep in mind that payday loan APRs are so high because payday loans are meant to be paid over a much shorter time than a traditional loan, like a home loan or car loan. Those are paid over many years. Mortgage repayments can be up to 25 years. Payday Loans condense the APR rate. The percentages are calculated as if the loan was for an entire year. Hence the ‘annual’ in Annual Percentage Rate. Payday loans are known for having the highest rates, or APRs. It differs from lender to lender, with an average of around 400%. 


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