APR and the True Cost of Credit for Loans Until Payday with Payday Express
Payday Loans are ideal if you are in need of some month end money in the form of a loan until payday,
where you just need to borrow a small amount of cash for a relatively short period
of time and can afford to repay it once you’ve been paid. However, due to the short-term
nature of the product, loans til payday have
high APRs, which they are regularly criticised for. As a payday loan company, we
would like to point out the inability of APR to provide a clear picture of the true
costs of borrowing for short term cash loans.
APR (Annual Percentage Rate) was designed to enable customers to compare credit
products. However, while it is helpful when you compare like credit offerings, it
is extremely unhelpful when you compare different offerings.
APR is limited
If, for example, you are comparing two loans with the same value, and the same loan
duration, APR will enable you to compare the cost of borrowing and can then help
you to decide which loan would cost less and, therefore, be favourable. If, however,
you compare loans with different variables, such as comparing a £200 loan until
payday, with a loan duration of a month, with a £3,000 loan, with a loan duration
of a year, using APR will not provide a clear picture of the true cost of credit.
Comparing these loans is like comparing apples with oranges.
We, as a payday loan company, advocate that,
when comparing different loans, you need to consider how long you need the money
for, and how much you want to borrow, and then assess how much the loan will cost
you after it has been repaid in full. You are then in a position to consider whether
the benefits of the loans in question outweigh the cost of the credit.
Don’t be fooled by APR
The APR will be lower the longer you borrow the money for. Therefore, if you compared
the APRs of two loans of the same value over different periods of time, it would
appear that you would get a better deal when borrowing the money over a longer period
of time. However, the actual cost of the credit would be more because you would
have had to pay more in interest for the same amount of cash.
The following example clarifies this. If you bought a product costing £199.99 on credit and spread the cost over 12 months
you would have paid interest on the amount each month. With an APR of 218.4%, at the end of the 12 month period you would have repaid a total of £354.43.
This means you will have paid 77% on top of the initial cost of the product. If, on the other hand, you took out a £200 loan until payday,
for a period of 28 days, you would need to pay £58 in interest, and the APR would be 2670.8%. This APR is staggering.
However, rather than paying back £354.43 for a £199.99 loan you would pay £258 for a £200 loan with the payday loan advance.
This is more than £96 less in interest, despite the fact that the APR is massively higher! While the APR on the payday loan advance is significantly higher,
the actual amount of money you re-pay is much less in this example, since you repay the loan in full after a month, with one interest payment.
If you actually wanted to borrow the cash for the period of a year, then the 12
month loan would still be preferable to the loan until payday. However, if you only
need the money for a short period of time and can afford to re-pay it on your next
payday, then the payday loan advance option may actually be better, in spite of
the higher APR.
APR will be higher the less time you borrow the money for. Since you tend to borrow
the money for less than a month with loans till payday, as you borrow it between
paydays, the APR will always be high. However, if you don't need to borrow the cash
for a long period of time, then why pay more money in interest in order to have
a longer loan duration; why not just get a loan until payday, which enables you
to be debt free as soon as it's been repaid on your payday?
For the clear picture look at the true cost of credit - not APR
Payday loans lenders stress that you need to establish
what the true cost of credit is and whether you are happy to borrow cash at this
cost, rather than simply looking at the APR. You may not want to take out a larger
or longer term loan. It might, when comparing APR look to be a more favourable offer
than a small short-term payday loan, but may not actually be cheaper when you consider
the total amount repaid in interest.
Representative Example
If you borrowed £200 for 28 days you would repay a single payment of £258, with an interest rate of 378% variable per annum. 2670.8% APR representative.
We believe that, if you are happy to re-pay £29 for every £100 cash you borrow, at
a 29% cost of credit, and can afford to repay the loan on your next payday, then
it needn't matter what the APR is, since loans till payday are
short term loans and APR is an annualised rate.