APR and Its Formulae

Those who consider payday loans inappropriate financial option usually ground their opinion on the fact that APRs associated with easy payday loans are huge. However, before saying that APR of 400% or higher is totally wrong thing individuals should understand the reason for such figures and to know the APR formulae. Nevertheless, many people will keep on saying they need to know nothing of APR for they are customers and not specialists. Informed customer, however, is usually more success.

Have a look at APR closely!

Annual Percentage Rate, or APR, is determined according to many factors, the most important of which is time. Short term financial advances are much more expensive, with APR much higher than that of a conventional loan. To be exact with figures one should use an online payday loans calculator, which is always available online.

APR is generally calculated as follows:

Annual Percentage Rate = ((Interest Rate/Amount Borrowed) * (Days in a Year/Days in term of contract)) * 100

EXAMPLE:

You borrowed $100 with $15 charged for 14 days. Let's calculate!

Interest Rate/Amount Borrowed = $15/$100, which is 0.15

Days in a Year/Days in term of contract = 365/14, which is 26.071 rounded up.

Now multiplication: 0.15 * 26.071 = 3.9107 again rounded up.

And finally, multiply it by 100, which results in 391.07%.

So, the formulae is (($15/$100) * (365 days/14 days))*100 = APR of 391.07%.

Okay, now let's calculate conventional loan's APR and compare.

Imagine you availed $100,000 for 30 years with APR equating to 3.6%. After all calculations you have extra 63% of the original amount borrowed. Thus 3.6% turns out to be not really 3.6% when it comes to long term loans, such as mortgage.

Now, taking into account calculations above, you can estimate whether $15 for $100 is extremely high for a short term cash till payday.

The determining factor is the time the money is borrowed. This shapes APR and prompts us the final outcome of the borrowing.

All lenders are obligated in law to provide their customers with information on their APRs. What is certain is that APR cannot be high without sufficient reason.