A Sober Analysis of Payday Advance Interest Rates

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One of the major accusations by critics of the payday advance business concerns the annualized rate of interest applied to short term payday advance loans which may build up to a multiple of the payday advance issued.

This annual percentage rate (aka APR) is defined as a widely accepted metrics to check the entire amount of interest a debtor must pay for a full year. This APR gives us an accepted mechanism to properly determine which medium entails a higher / lower ultimate cost to the borrower, containing attendant charges that might kick in.To be sure, the annualized rate of interest has deservedly been acclaimed as a beneficial algorithm relating to loans or investments with a duration of at least one full year .Unfortunately, when you are dealing with short term payday cash advances the lending rates are certainly less suited.

To illustrate this point, let’s compare payday advances to deciding on a taxi to get home from the railway station. It might cost you $40 to get home this way. Obviously forty dollars may be quite a bit of money to pay for a mere ride home nonetheless people will go for it for the simple reason that it is agreeable and reconciles a deficiency. Now we all know that we could easily hire a car for the whole day for $40 including as many miles as we wish.

Ok, now let’s just assume we do that— i.e. rent that car and drive it for 400 miles during this one day we’ve rented it. Now the supporters of APR would probably tell us that we need to annualize this figure to produce a viable comparison… So to illustrate our point, let’s take the amount charged for the taxi ride ($2 per mile times 400 miles) the result being eighthundred bucks. The “APR” correlative of the car rental approach vis-a-vis that ride by taxi gives us $40 vs. $800. Now, our critics know that car hire we opted for was not the world’s best option, notwithstanding how much more expensive the annualized rate of interest was in this particular case.

And exactly the same applies to fast cash advance loans. Short term payday advances are limited to two weeks, they’re not annual loan agreements. The obviously high “APR” is beside the point because after all this specific class of loan does not span the full year. The interest charged will actually be fifteen to twentyfive percent for the loan. A same day payday loan is an expensive contingency option not to be adopted sans inspecting all viable alternatives.