What is APR?

Author · Modified on 1 November, 2022

APR is an acronym for Annual Percentage Rate and tells you what the interest applied to your loan is for a whole year, expressed as a percentage.

The APR represents the cost of borrowing and it is used to measure and compare all financial products across the world as a yardstick, including products such as credit cards, mortgages, personal loans, car finance and more.

APRs can still apply to loans even if you are borrowing for less than a year, such as payday loans or short term loans of 3 or 6 months – but these can often be multiplied and appear higher than usual.


Key Points:


  • APR stands for Annual Percentage Rate and refers to the interest applied to a loan over the course of a year. This is the cost of borrowing, and the figure you will need to pay back in addition to the money you’ve borrowed.
  • Average APR on payday loans sits at around 400%,  which is why these loans are an expensive means of borrowing.
  • Some states restrict how high APR can be, such as Colorado which caps APR on payday loans at 36%.
  • Representative APR is different from regular APR. It shows what the average consumer will pay in interest, and won’t reflect what you will pay.


What If I’m Borrowing For Less Than A Year?


APR represents the cost of borrowing for a year, but is useful to understand regardless of how long you are personally loaning for.

APR is calculated by dividing the amount of interest paid by the sum borrowed. To make this into an annual rate, the figure is multiplied by 365. The resultant figure is then divided by the length of the repayment term, and finally is multiplied by 100 to make it a percentage. The figure at this point is the APR.


How Do I Find Out A Payday Loan’s APR?


Lenders operating in the States are legally obligated to clearly display APR on any loan advertisements. You will be able to see what APR is attached to loans on lenders’ websites, or you could call them and directly ask them.

This means it will be very easy to see what the APR is and you can easily compare it to other lenders and their loans.

Financial comparison websites will illustrate a side-by-side comparison of different loans, including their respective APRs.


What Does It Mean If APR Is Low?


If the APR applied to your loan is low, it means the cost of borrowing is low and this loan is a cheaper option for you.

For example, many credit card companies will offer 0% APR on purchases and balance transfers for the first few months you are with them. This is to entice consumers to choose them over other firms. After this period, higher APR will kick in.

APR on payday loans are normally paid back over a shorter period than other loans. This means that the APR is concentrated even if the overall cost is the same. Because of this, payday loans famously have very high rates of APR, rendering the loans expensive for borrowers.

Different lenders will offer differing APR rates, but the average APR lies at about 400%.


APR on payday loans is infamously high due to their short term and urgent nature


How Much APR Can I Be Charged?


Most lenders will offer rates of around 390-600% APR. However, the legal restrictions on APR will depend upon your state. While some states such as New York prohibit payday loans altogether, some will have their APR capped at 300% or 400% APR, such as in Nebraska and Illinois.

To ensure that you are being treated correctly and in accordance with regulation, you should ensure that your lender is licensed. If you suspect that they’re not, you could search for their license on their website or ask them to see it.


What is the Average APR Rate?


An APR rate can be as high as 1,500% on payday loans but the average sits at around 391%, which is significantly higher than the APR rate of other lending products, such as credit cards or personal loans from banking institutions.


Is Representative APR The Same As APR?


Many payday lenders will use the term ‘representative APR,’ which is not the same as regular APR. Representative APR represents what at least 51% of customers will pay – hence the name ‘representative.’ This will not necessarily equate to the rates you will pay and your rate could be higher or lower.

What you will pay will depend on a number of factors such as your credit history will come into the equation, as will how much you are borrowing and how long you are borrowing for.


what is apr
Different lenders will offer different APR rates, while some will be limited by state legislation.


What Happens If I Can’t Pay Back My Loan And APR?


Paying back short-term, high interest loans can be difficult and require planning ahead and budgeting to manage.

Should you find yourself unable to pay back the loan, you could be faced with the following problems:

  • Threatened legal action.
  • Damage to your credit score, making it difficult to secure future loans.
  • Further fees, making borrowing even more expensive.

This means you should be very familiar with the terms of a loan before entering a contract. Should you still be unsure once you have researched it thoroughly, you could approach a financial adviser.

Payday loans should also not be viewed as a long-term solution to financial problems. They are intended to cover urgent and unexpected costs such as medical bills and car repairs.

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