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APR is the abbreviated name for Annual Percentage Rate. Your APR shows you how much your loan is going to cost for 12 months. This can get confusing because payday loans are short-term loans, usually taken out for less than a year. In this guide, Kallyss will help you understand APR and how it works. 

What does APR mean?

The Annual Percentage Rate (APR) outlines the price of the loan over one year. Borrowers can use the percentage rate to understand how expensive a loan product is and better compare products offered by different lenders. 

It’s easy to check the APR of your payday loan; the lower the number, the cheaper the loan!

Why is APR Used?

APR is used as an official measure to present the cost of different financial products. It is used to describe the rates for loans, mortgages, car finance, and many other forms of credit. Because it is an annual percentage, it is particularly helpful in understanding long-term financial products.

How does APR work if you borrow for less than a year?

APR works as a percentage proportionate to the amount you take out with your loan. As an annual percentage, this number defines the price of credit for one year, regardless of the loan duration. If you borrow for less than a year, you will have to calculate how much this will cost, based on the APR.

How is APR calculated?

APR is calculated by dividing the amount of interest to be paid by the amount of money borrowed. This number is then multiplied by 365 to give the annual price. That figure is divided by the period of the loan and multiplied by 100.

Will APR show me if a loan is too expensive? 

APR isn’t always the most convenient way to see if a loan is too expensive. It may be more helpful to assess the affordability of a loan by considering the interest rate over a shorter period. For example, compare the daily or weekly cost for $100 borrowed. The overall cost of your loan will depend on how much you borrow and how long for, but this can give you a good idea of how expensive it will be. 

Does APR accurately represent the total cost of a payday loan?

Unfortunately, not always! It is actually up to the lender to decide which fees are included or excluded in the APR. APR is confusing enough to understand, but it gets trickier when we think about hidden costs. A lender doesn’t need to include any extra fees that they charge within the APR. As a result, it can be easy to get caught out by hidden fees! 

We recommend carefully checking all extra costs associated with your loan and adding these to your workings. This will give you more accuracy in figuring out if a loan is affordable. 

Why is APR important?

APR is important because it is the first thing to consider when deciding if you can afford the loan. You must know that you will be able to afford loan repayments before entering a contract. If you default on your loan, there may be late fees and added interest which could enter you into a cycle of debt. This could also negatively impact your credit rating, making it harder to get credit in the future.

How do I find out the APR of a payday loan?

To find out the APR of a loan, check the lender’s website or advertising. The Financial Conduct Authority (FCA), which regulates all reputable lenders in the United States, legally requires lenders to display the APR. The APR should be visible on any adverts or marketing information for credit products. This makes it easier for borrowers to compare the loans on offer by many different payday lending companies. 

Why is APR so high for payday loans?

Payday loans are shorter-term loans than other loans. This condenses the APR rate even if the cost is the same. As a result, payday loans are renowned for having one of the highest APR rates. This means that it can sometimes be harder to pay back than credit card loans.

Is representative APR the same as APR?

Payday lenders sometimes use the term Representative APR which is not the same as APR! Representative APR is an average used primarily for advertising purposes. Lenders use it to give customers an approximation of the average cost of a loan.

Is representative APR accurate?

The representative APR advertised by a lending company has to be the rate that more than 50% of their customers pay. Individual APR rates offered will vary depending on the customer and their credit needs. However, you can consider representative APR as a first example of how expensive a lender is.

What is the maximum APR?

Shorter-term payday loans typically incur higher APRs. These can range from around 390-780% APR. Many states in the USA have APR caps in place. States such as California, Colorado and Indiana have a cap on how high the APR for a payday loan can be. Others do not and this often means extremely high APR’s.