A claim often stated about payday lenders is that the APR charged for payday loans is more than 100 percent per year. With one view on it, that might be the truth. The supposed high interest is among the reasons that the financial reform bill calls for further restriction on payday lending. It seems like this is just trying to fix what isn’t really the problem.
What is APR?
APR actually stands for Annual Percentage Rate. APR can be calculated in different ways, and standards differ between institutions and by regulations of any given country, but that is a different topic. The way the figures for the fees for payday lenders are calculated, according to prnewswire.com:
APR = [(interest rates or fees/amount being loaned) X (days of one year/the term of the contract)] X 100.
So a person borrows $ 200 and is then charged $ 15 for a loan due in 14 days.
$ 15/$ 200 = 0.075
365 days/14 days = 26.0714
Next, we will multiply the two figures:
0.075 X 26.0714 = 1.955
Next, multiply that by 100: 1.955 X 100 = 195.5 APR
Now, the going assumption is that this APR rate would compound again and again were the loan to extend over the entire year, which it certainly does not. This loan is only for 14 days, not 365.
APR in a more accurate picture
If one were to take the view that the fee of $ 15 were to apply to every two weeks of the year, it would look like this:
$ 15 per every two weeks, and 52 weeks per calendar year. So, since there are 26 two week periods:
$ 15 X 26 yearly two week periods = $ 390 total interest
Divide the total interest by the principal:
$ 390/$ 200 = 195 percent
Even though the 195 percent matches the figure above, one who gets a payday loan or cash advance of $ 200 with a $ 15 fee will only be paying $ 215, not $ 390.
So looking the sum total:
$ 200 + $ 15 = $ 215 The difference in total paid, less the principal:
$ 215 – $ 200 = $ 15
If we divide that over the principal:
$ 15/$ 200 = .075, or 7.5 percent
That doesn’t seem usurious to me
Targets easier
Now, unlike payday loans, credit card interest always compounds monthly. Also, unlike payday loans, you don’t close a credit card two weeks after you open it. Thinking like that, are we sure that government should be regulating payday lenders with the financial reform bill before other forms of consumer credit?
Additional information at these websites
Annual Percentage Rate
http://en.wikipedia.org/wiki/Annual_percentage_rate
prnewswire.com
http://www.prnewswire.com/news-releases/the-truth-behind-the-numbers-what-aprs-really-mean-explains-pay1daycom-94574259.html
