Annual Interest Rates (or APR) is the most common method of comparing money that is loaned over a period of at least 12 months or longer.  Payday loans are set for a period of 1 month, so it is not surprising that APR can seem misleading.

For instance, a loan of £2000 taken over a period of 36 months, or 3 years comprises an actual interest of 49% which translates in an APR of 16.9% whereas a Payday loan of £1000 taken over a period of 1 month comprises an actual interest rate of 25% which translates into an APR of 1355%.

Why is the APR on a payday loan so high?

Any credit provider has to quote APR in terms of interest rates yet is it not really a realistic way to calculate the repayment rate on payday loans.  Payday loans are designed as a means to bridge the gap between paydays; therefore the repayment period never exceeds 31 days. Most consumers are simply confused by APR.

Using APR as a method of calculating pay day loans suggests that this type of loan is comparable to other, larger forms of credit, yet they aren’t.  Payday loans provide instant short term finance therefore APR can only be relevant when comparing identical long term loans.

What makes them even more confusing is that when payday loans are compared to bank charges incurred on unarranged overdrafts or when people try to make direct debits with insufficient funds, you can see that payday loans are often a cheaper and more transparent alternative to having to bear the brunt of penalties and bank charges that having no funds in your account incurs.