Payday Loans and the APR Associated With It
Posted on by Laura
If you are in search for a short term financing, you should be aware of the APR. Just like any other short term financing, payday loans involve APR or Annual Percentage Rate. As a borrower, you have the right to know how the interest rate is determined. It is evident that this type of loan has higher interest rates as compared to traditional loans. That is why many critics believed that the computation of the interest rates is not accurate.
This is the reason why the government mandated lending companies to be transparent about the interest rates to their customers so that they will know how much the loan will cost them. However, there is a couple of reasons linked to higher interest rates. The first reason is that this type of loan is a short term, and most likely is payable within two weeks. That is why lending companies are giving higher interest rate to offset the risk such as failure of payment. Secondly, the loan limit is low yet some borrowers find difficulty in repaying the loan.
Moreover, majority of people complaining about the higher interest rates are those fraudulent borrowers who have bad habits of failing to repay the loan. Obviously, there are borrowers who are used of taking several loans beyond their financial capability of repaying it on time. Another reason why payday loans have higher interest rate is because customers pay for the convenience of the loan while lending companies are capitalizing it for their business.
To be fair with the lending companies it is vital that borrowers should understand the computation of interest rate as well as the Annual Percentage Rate. Thus, the APR is computed by using specific formula. The fee for the loan is multiplied by the number of pay periods within the year. This means that within 1 year, there will be 26 pay periods if the lender will assign payment every two weeks. That is why if the loan fee is £15 and the pay period is 26 the yearly charge will be 390. Likewise, in order to obtain the percentage rate, the yearly charge is divided by the loan amount and multiplied by 100.
Now that you already know the APR involve in obtaining instant loans, the next thing to do is ensure that you will obtain the amount that is within your capability of repaying it. Otherwise, if you will apply for a higher amount of loan you will find trouble in repaying it. Keep in mind that the additional charges you might incur upon failure of payment will add up to your principal loan amount.
Therefore, you should always remember that payday loans are available and ready to help you out of financial crunch. Nonetheless, it may be also the way to lead you in a pile of debt. This way will aggravate your financial status instead of improving your finances. That is why before taking any action, you should first determine if obtaining instant cash can improve or aggravate your finances. Otherwise, better think for other options.
