Why Is The APR On Payday Loans So “High”?

The APR on payday loans frequently gets them in trouble.  Compared to the cushy 6%, 12%, 18% loans coming from banks, a 391% loan sounds insanely high in stark contrast..  Thing is, APR is about the worst thing you can use to measure the effectiveness of instant cash advance loan companies.  The thing about instant cash is that it needs to be paid back very quickly.  Often, compared to late fees, the 'dreadfully outrageous' 391% is far below what the APR is when those are included. APR stands for Annual Percentage Rate, and because payments are usually considered monthly, the calculations get a little exaggerated.

Let's say, for example, that you owe $100 more dollars on a heating bill than your budget allows.  In some areas of the country, that is easy to do if a surprise snowstorm hits where there usually aren't snowstorms, or a heat wave in areas that are generally cooler.  You try writing a check for it, and the check bounces unexpectedly.  The bounced check with a $48 NSF/merchant fee alone has a whopping four digit APR: 1,251%.  Compared to the 391% APR, which for $100 is a $15 fee, using APR as a basis for comparison seems a little mismatched.

The check bounced, so you try using a credit card.  Turns out, your credit card was a bit late one month, and your cushy 12% APR credit card hits you with an annoying $26 late fee.  APR is not a percent of the amount due.  26% of $100 is $26, but that's not what APR calculates.  26% of $100 by APR calculations is 678%.

Because you used the credit card, the utility company got their money.  They give you a $50 late-payment-and-reconnect fee, which is at 1,304% APR.  These sort of calculations and situations are why using APR to gauge payday loans is a horrible comparison.  They have nothing in common and the calculations are mind-boggling.

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