The reason most people go for payday loans is the easy hassle free application and quick approval process, but they should keep in mind at what interest they are getting the payday loans. Some Jurisdiction limit the APR (Annual percentage rate) the payday lender charges, to prevent unreasonable and excessive rate of interest.
Knowledge the facts about APR will help you to make a wise decision in regards to payday loans.
Annual Percentage Rate of Interest (APR), is a standard measure that calculates the simple interest rate on an annual. US Government passed the Truth in Lending Act in 1968, which features that lenders must disclose the APR for all kind of loans. Due to Truth in Lending Act (TILA) a person is entitle to know the lending rates available in market, and he can compare and choose the best form of credit for his needs.
In 2021 FED formally clarified that the legal definition of credit includes payday loans and their cost must be disclosed in terms of APR under TILA.
To calculate the APR if you know the finance charge
Say you have borrowed (i.e) Amount financed 400$ and the finance charge is 50$ for 14-days term.
Divide the Finance charge by the Amount financed
Finance charge / amount financed = 50 / 400 = 0.125
Multiply the result from the first step with the no. of days in the year
Result from step 1 * no. of days in year = 0.125 * 365 = 45.625
Divide the result from the second step by the term of the loan (14 days)
Result from step 2 / loan term = 45.625 / 14 = 3.2589
Multiply the third step result with 100
Result from step 3 * 100 = 3.2589 * 100 = 325.89
The Answer 352.89 is the Annual Percentage Rate (APR)
To calculate the APR if you know the cost per $100
Say you have borrowed (i.e.) Amount financed 600$ and the cost for the loan per 100 is 20$ or 20%
Divide the Amount financed by 100
Amount financed / 100 = 600 / 100 = 6
Multiply the result from the step1 with the cost for the loan per 100 (20$ or 20%) to find the finance charge
Result from step 1 * cost of the loan = 6 * 20 = 120
And Hence the finance charge $120 and the amount financed is $600
Since you come to know the finance charge you can follow the first calculation steps as
Divide the total finance charge ($120) by the Amount financed ($600)
120 / 600 = 0.2
Multiply the above answer (0.2) with the no. of days in the year (365)
0.2 * 365 = 73
Divide the resulting answer (73) from the above step by the loan term (14 days)
73 / 14 = 5.2143
Multiply the answer (5.2143) from the above step with 100
5.2143 * 100 = 521.43
The Answer 521.43 is the Annual Percentage Rate (APR)
As Finance charges, the customer may pay from $15 to $30 per $100 borrowed for 14 days, which translates to Actual Percentage Rate (APR) of 391 to 782 percent.
The above mentioned finance charges or APR is for the calculation purpose, the APR or finance charges may be vary depending on the lender and the states in their jurisdiction.