How (and Why) to Calculate the APR for a Payday Loan

Learn how to do both here. Most banks and credit unions offer payday loans. So do many check cashing stores and online sites. How much will the total loan cost be? However beware, the APR is more than the monthly rate times By looking in each cell of the calculator, you can see how easy it is to calculate an APR for short-term less than one year loans.

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To use this calculator, make an entry in dollars and cents to the loan amount field, the loan fee (or fees and charges) in dollars and cents and a repayment time in days. Click on Calculate and see the (often terrifying, certainly expensive) APR for this loan. You may click on Clear Values and do another. You MAY enter a decimal for entries in all fields . For instance, compare the APR of a $ payday loan to the late fee on a credit card, utility bill or a bounced check fee for a similar amount, and payday loans start to look like a bargain. How Do You Calculate The APR Of A Loan? . Annual Percentage rate (APR) explains the cost of borrowing with a variety of loans, including credit cards and mortgage loans. Costs are quoted as a percentage. For example, if your loan has an APR of 10 percent, you would pay $10 per $ that you borrow each year.

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This may be over a hundred times the first month's interest rate. The higher the monthly rate, the faster the overall cost of the loan soars which is why it's important to get the lowest rate.

Payday loans are short-term, high-APR loans, usually designed to be paid off completely at your next payday. Instalment loans, for instance from banks or credit unions, are longer-term, lower-APR loans, which you pay off in regular arranged instalments to spread the cost.

Some payday loan companies offer to let you 'roll over', paying just the interest for a small number of months to postpone paying back the original loan. However at high APRs this monthly interest alone can quickly add up to more than the total originally borrowed. If you need credit longer term it is worth looking into arranging lower-APR instalment loans, for instance from a local credit union. Payday loan adverts often emphasise how fast you can receive a loan.

But this may mean you rush into borrowing money at very high interest rates. Lenders such as credit unions or banks may take a day or two to process your loan request and check it's affordable. And because credit unions are not-for-profit they may be more sympathetic to your personal financial situation.

To compare the interest cost of different types of credit over one month, try setting the APR on the tool above then sliding the time period to 1 month. For more information on credit unions near you visit the Association of British Credit Unions website. Or watch this short video-clip about credit unions.

It may be just a "representative" rate. In practice lenders often charge different people quite different APRs depending on various factors including the amount borrowed and duration of the loan - so you may actually be charged more than the rate in the advert.

Some lenders add various extra fees and charges on top of the interest, especially for late repayment. And not all of these are factored into the APR. Remember to compare lenders' charges as well as their APRs and make sure you fully understand all the charges before you commit to borrowing. Especially what will happen if you don't repay on time. Take your time to look at the small print and don't be afraid to keep asking until they have explained it all clearly, or to walk away.

Remember you are the one who is paying them for the loan - it is the lender's responsibility to make it clear what you are signing up to!

Remember to think carefully about the cost of any loan, including the interest rate and any charges, and how and when you will get the money to pay it back. If you can possibly plan to save some money at the same time, you can start earning compound interest instead of paying it.

Young, British and Broke: The tool on this page offers a simplified calculation of how costs can spiral if you keep taking out short-term loans.

The person presenting the video has got his MS Excel sheet with all the formulas and data ready. Next he calculates the 25 day interest rate by dividing the future value by the present value and subtracting it by 1.

Next he tells you to find out the total number of periods in a year. It is calculated by dividing by 25 and the resulting value is The next step he says is to calculate the APR or the nominal rate which is the period rate times the number of periods in a year. The final rate to be calculated is the EAR, the Effective Annual Rate for which the formula used is the value of the period rate subtracted from 1 and the exponent of this value with the number of periods in a year and finally subtracting the value by 1.

The EAR thus calculated is found to be The resulting value is The difference in the EAR value found using the math formula and the function in MS Excel is because the function truncates the number of periods value which means it takes 14 as the number of periods and not To report any unresolved problems or complaints, contact the division by telephone at or visit the website http: The use of high-interest loans services should be used for short-term financial needs only and not as a long-term financial solution.

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Central Time, or by sending an email to help opploans. To convert into APR, just move the decimal point two spaces to the right and add a percentage sign: Why is the APR for payday loans so high?