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One of the claims you hear about payday lenders is that the APR charged for payday loans is more than 100 percent per year. With one view on it, that might be the truth. More restrictions on payday lending is being called for in the financial reform bill because of this supposed high interest. It seems to me that we are just trying to fix something that is not actually the problem of it all.

Resource for this article: Claims of high interest from payday lenders involve bad math

What actually is APR?

APR actually stands for Annual Percentage Rate. APR can be calculated in different ways, and standards differ between institutions and by regulations of any given country, but that is a different topic. Anyway, the way the figures for the fees for payday lenders are calculated, according to prnewswire.com:

APR = [(interest rates or fees/amount being loaned) X (days of one year/the term of the contract)] X 100.

So a person borrows $ 200 and is then charged $ 15 for a loan due in 14 days.

$ 15/$ 200 = 0.075

365 days/14 days = 26.0714

You will next need to multiply the two figures:

0.075 X 26.0714 = 1.955

Multiply that by 100: 1.955 X 100 = 195.5 APR

That is going off the false assumption that the APR rate would compound again and again if the loan extended over the whole year. The loan will only be out for 14 days, not 365.

APR in a more accurate picture

If someone used to view of paying $ 15 every two weeks of the year, it would look like this:

$ 15 every two weeks with 52 weeks per calendar year. There are 26 two week periods per year, so:

$ 15 X 26 yearly two week periods = $ 390 total interest

Next we will divide the total interest by the principal:

$ 390/$ 200 = 195 percent

Though 195 percent is right around the figures above, a person who borrows a cash advance or payday loan of $ 200 with a $ 15 fee certainly does not repay $ 390, they repay $ 215.

Next we look at the sum total:

$ 200 + $ 15 = $ 215 Less the principle for the difference in total paid:

$ 215 – $ 200 = $ 15

If we divide that over the principal:

$ 15/$ 200 = .075, or 7.5 percent

That doesn't seem usurious to me

Easier targets

Credit card interest does compound monthly, unlike payday loans. You also don’t close a credit card two weeks after opening it. Thinking in those terms, are we sure that government should be regulating payday lenders with the financial reform bill before other forms of consumer credit?

Read more on this topic here

Annual Percentage Rate

http://en.wikipedia.org/wiki/Annual_percentage_rate

prnewswire.com

http://www.prnewswire.com/news-releases/the-truth-behind-the-numbers-what-aprs-really-mean-explains-pay1daycom-94574259.html

Tags: Annual percentage rate, Credit Cards, financial reform bill, payday lenders