The Truth Behind The Numbers: What APR%’s REALLY Mean
The Truth Behind The Numbers: What APR%’s REALLY Mean by Gabriel Rodriguez
One of the most frequent objections to the payday lending industry from opponents is that the APR’s (Annual Percentage Rate) are “too-high“. Those who stand so strongly against the payday loan industry have usually never taken out a payday advance, and do not understand how to calculate an APR. Some will claim that they do not need to know how to calculate an APR, and that “everyone knows” APR’s of 400% and up are just “wrong” or “evil”.
Let’s take a look for ourselves!
APR stands for “Annual Percentage Rate”. It helps to understand a bit about how these numbers can fluctuate greatly depending on how long the loan is given; especially when these “Annual” ratings are applies to short-term loans. You can use an online payday loan calculator or you can calculate it yourself.
The basic formula to calculate an APR on a Payday Loan is:
APR = ((Interest Rate/Amount Borrowed) * (Days in a Year/Days in term of contract)) * 100
For example, if you borrowed $100 with $15 charged, for two weeks the calculation would look like…
First, we have to calculate $15/$100, which is .15
Then, we calculate 365/14, which is 26.071 (cutting out several digits to simplify)
Now, multiply .15 * 26.071, which comes to 3.91065 and rounds up to 3.9107
Multiply that by 100 to get the actual percentage of 391.07%, or as the formula would look….
(($15/$100) * (365 days/14 days))*100 = APR of 391.07%
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