I’ve lost track of the number of times people have asked me about the annual percentage rate (APR) and what’s included within the calculation when applied to payday loans. There’s obviously a lot of confusion out there so I thought i’d record this video to clear up a few things.
If you’ve already tried searching for explanation or definition of APR, you’ll no doubt be aware that it’s extremely confusing (unless you’re a professor of mathematics of course!). Watch the video for my own personal take on APR and what I believe is the best way to compare payday loan rates at the current time.
As always, I’d love you to hear what you think about APR and payday loans by leaving a comment below. Also, feel free to share this video with your friends on Facebook, Twitter and Google+.
Transcript of this video: APR Explained
Hiya, my name is Martin Smith, and welcome to the Payday Loans Information Centre.
Today I’ve decided to cover off a subject that many people associate with payday loans, and that’s the dreaded APR (or Annual Percentage Rate).
I know this is something that causes a shed load of confusion because if it wasn’t, my inbox wouldn’t be as close to breaking point as it is now with all the questions I’ve been getting about it. And in case you were wondering, YES, I read every single one of them.
Anyway, I promised I’ll make this video quick and simple, and don’t worry, I’m definitely NOT going to run through the obscenely complicated APR calculation because frankly, my brain just ain’t that big enough.
First off, if you just want some headline information on what a payday loan actually IS, get yourself back to the home page of this website and click on the welcome video in the centre of the screen. I am genuinely humbled and touched by the number of people that have commented on that video so if you HAVE got the time, I’d love to hear from you as well.
Right then, back to APR.
By the way, If you don’t know what the heck APR is and when it is used, the next time you catch one of those lovely payday loan adverts on the telly, this is the number that’s often quoted at the bottom of the screen as something like ‘Typical APR X thousand percent’.
It’s the number that gets everyone in a tizz and is often used by politicians and people in the media as a way of demonstrating just how expensive payday loans can be.
But what exactly IS APR, and what does it mean?
Well, as I mentioned above, APR stands for Annual Percentage Rate and is supposed to represent the interest and fees on a loan, expressed as a percentage of the original loan value, but calculated for the whole year, rather than just a monthly rate.
Like it or not, the payday loan companies are required by law to clearly state the APR on all their advertised loans, which is why you notice those obscene X thousand % figures all over the place.
The idea here is that customers have a standard way of comparing different loan providers and can make up their mind based on fact, rather than a glossy website or clever marketing and sales.
I mentioned earlier that I won’t be showing you the APR calculation because it’s too complicated but there was actually another reason, and that’s because I think that APR when applied to payday loans is total load of crap.
I’m serious. It’s completely meaningless and for once I AM with all those payday loan companies that have complained till their blue in the face about APR, and why it’s misleading when applied to payday loans.
I shall explain.
I’ve spoken about this already in the other videos but payday loans are NOT and should not EVER be used as a form of long term credit.
So if you need to borrow money for anything more than 30 days, talk to your bank, go to a Credit Union, whatever, just don’t get a bloody payday loan cause you’re just setting yourself up for world of pain.
With that in mind, and again returning to APR, I have no idea why is this measure for calculating annual (or long term) interest is being used to compare short term payday loans that are supposed to be paid back within a month.
It’s crazy, and given the fact APR is also applied to other forms of short term borrowing, like overdrafts, AND not all companies include things such as late fees the in their APR calculation, I’m not surprised people are confused about what interest they’re paying because I sure would be.
So what’s the answer? If we really do need a payday, how the heck are we supposed to compare rates? Well, it’s actually simple really, you ask the payday loan company to provide a total cost of borrowing for the loan you wish to apply for.
Most companies are actually starting to quote this alongside APR now so it’s nothing new but as far as I’m concerned the total cost of borrowing, which should be quoted as a straightforward £ figure and includes ALL the interest, fees and charges on a payday loan, is 100 times easier to understand than APR.
And that my friends, is a fact.
It may take slightly longer to get the information, but I sure you it’ll worth it. With the total cost of borrowing figure, you’ll categorically know EXACTLY how much you’ve got to repay the payday loan company, which will no doubt help when it comes to managing your money and budgeting for the repayments.
Remember there’s loads more information, videos, features and news throughout the rest of this website so feel free to browse away at your leisure.
I’m Martin Smith, thanks again for watching, and I’ll see you on the next video.