Let's talk about APR

Monday, 30/03/2015

It's well-known that the APRs typically associated with payday lending are larger than those offered for more lengthy credit periods. Intriguingly, the APR is only one factor that can influence repayment totals; a closer consideration of all the variables which can affect loan prices shows that in many cases, short-term borrowing is as cost-effective as opting for longer term, lower APR products.

APR is an annual rate

Remember that an APR is a yearly (annual) cost, which is only really relevant if you are taking out a loan with a repayment period of more than a year. When APR is recalculated as the daily rate of interest, customers often need to repay less when they borrow through new payday lenders (and pay their loan back within the agreed time frame) than if they take out the same amount on a credit card. With a credit card, they will subsequently accrue significant interest by taking longer to repay the balance.

Compound interest

Frequently calculated on a daily basis, many credit cards and longer term loans operate on a compound interest basis. This means that as well as having to repay simple interest (for example 10% interest on a £100 loan means a total repayment of £110), customers also need to pay interest on the £10 interest for the loan's duration. Compound interest can add significantly to your overall repayment figure.

Additional charges

In addition to interest, many loan providers also levy a fixed administrative fee, late charges, early repayment charges and credit transfer charges. These can substantially increase the total repayment figure. Payday loan products may include some of these fees, but they can also be highly competitive when compared with other available borrowing options.

Whilst comparing loan products is always sensible before deciding which one to opt for, it’s unwise to simply rely on the APR figure to identify which one will be most economical. Take time to look at the total amount that will need repaying, additional charges and loan duration in order to ensure you can make an informed decision about which is right for your needs.

Payday loans are not suitable for, and would be expensive as, a means of longer term borrowing and are not appropriate if you are in financial difficulty.

Representative 1269.7% APR

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Warning: Late repayment can cause you serious money problems. For help, go to moneyadviceservice.org.uk