The APR of a payday loan is a good way to compare the rates of different lenders. Congress passed the "Truth in Lending Act," which says that payday lenders must tell you the APR. Some companies tell you this on their website, while others only tell you the amount of the fee and the APR after you have filled out an application.
Using the fee amount and the following formula, you can figure out the APR. This way, you'll be able to compare prices accurately and find the best deal.
The Recipe
Start by multiplying the fee for a payday loan by the number of times you get paid in a year. So, there are 26 pay periods if a payday loan lender charges a fee every two weeks.
We'll use a loan fee of $15 for every $100 borrowed as an example. This is a typical rate, but first-time borrowers can often find rates that are lower.
This is how the formula looks:
15 times 26 payments equals 390.
The 390 is the cost of the loan for one year. We need to take one more step to find the percentage rate. Divide the annual fee by the amount of the loan, then multiply the result by 100 to get the percent.
For example, since our original loan amount was $390, we will multiply that number by $100. Here's how it works:
390 times 100 (the loan amount) equals 3.9
When you multiply 3.9 by 100, you get 390 percent (APR)
The Meaning
Payday loans give you an advance on your next paycheck, with the idea that you will pay back the loan when you get paid again. You won't have to pay $390 in finance charges for the whole year. You'll only have to pay $15 per pay period. But if you roll the loan over, you will have to pay more in interest.
Cash advances are best used for short-term emergencies, like fixing your car or paying for a bounced check. Credit cards and personal loans are better options for longer-term credit. Even though these loans will affect your credit score, the rates will be better.
