One of the most frequent objections to the payday lending industry from opponents is that the APR’s (Annual Percentage Rate) are “too-high“. Those who stand so strongly against the payday loan industry have usually never taken out a payday advance, and do not understand how to calculate an APR. Some will claim that they do not need to know how to calculate an APR, and that “everyone knows” APR’s of 400% and up are just “wrong” or “evil”.
Let’s take a look for ourselves!
APR stands for “Annual Percentage Rate”. It helps to understand a bit about how these numbers can fluctuate greatly depending on how long the loan is given; especially when these “Annual” ratings are applies to short-term loans. You can use an online payday loan calculator or you can calculate it yourself.
The basic formula to calculate an APR on a Payday Loan is:
APR = ((Interest Rate/Amount Borrowed) * (Days in a Year/Days in term of contract)) * 100
For example, if you borrowed $100 with $15 charged, for two weeks the calculation would look like…
First, we have to calculate $15/$100, which is .15
Then, we calculate 365/14, which is 26.071 (cutting out several digits to simplify)
Now, multiply .15 * 26.071, which comes to 3.91065 and rounds up to 3.9107
Multiply that by 100 to get the actual percentage of 391.07%, or as the formula would look….
(($15/$100) * (365 days/14 days))*100 = APR of 391.07%
On this next example below I’m using an online long term APR calculator
Below, I’m calculating what 3.6% APR would be for 30 years on a $100,000 loan. It ends up adding roughly 63% of the original amount borrowed.
WOW!! Only 3.6% APR ends up being 63% of the original amount financed, on this standard 30 year loan (mortgage) scenario!
Which means you’re probably asking yourself, “If only that situation is only 3.6% APR, why does over 391% APR only end up being $15 for $100 borrowed?”
The answer lies within the time-frame, or the amount of time the money is borrowed. Due to the “truth-in-lending” act, nearly all lenders MUST disclose the APR in writing to the borrower. Unfortunately, when used on a short-term loan, APR’s can increase greatly when the term is decreased.
Hopefully this will help you to form your own opinion next time you read about Payday Loan APR’s being “too-high”.