APR stands for Annual Percentage Rate and lets you know how much your loan is going to cost over one year. However, APRs can be confusing, especially because payday loans are often repaid in less than 12 months.

In this guide, we’ll run you through some of the most common questions about APR to help you find the right loan product.

What is APR?

The Annual Percentage Rate (APR) of a loan represents the cost of the loan over one year. Borrowers can use the percentage rate to compare loan products from different lenders. The lower the APR, the less the interest will be. 

What does APR mean if you are borrowing for less than a year?

The APR is a percentage, which is proportionate to the value that you’re borrowing. It works as an annual percentage, showing the cost of funds for one year, regardless of the duration of the loan. 

The APR for a payday loan is calculated by dividing the amount of interest paid by the amount of money borrowed. Then, this figure is multiplied by 365 to represent the annual rate. Then, that figure is divided by the length of the repayment term and multiplied by 100.

 Is APR the right metric to judge if a loan is too expensive? 

APR isn’t always the most helpful way to assess how much a payday loan will truly cost!

Instead, thinking about the interest rate over a shorter period can be more practical. For example, check the weekly cost per £100 borrowed. The cost of your loan will depend on how much you borrow and how long you borrow for, as well as other factors.

Don’t get caught out by hidden fees! Remember that the lender can choose which fees are included or excluded in the APR.

It’s vital to make sure you can afford the loan repayments. If you fail to pay, there may be late fees and added interest. This could also negatively impact your credit score, making it difficult to get future credit elsewhere.

How do I find out the APR of a payday loan?

In the United States, the Financial Conduct Authority (FCA) regulates all reputable lenders. Lenders are legally required to display the APR on any advertisements or marketing information for their products. As a result, Borrowers can easily compare loans from many different lending companies. 

Is representative APR the same as APR?

You may see the term ‘Representative APR’ used by payday lenders. This is not the same as the APR shown when you are offered a loan. Lenders use representative APR to give consumers a sense of what the average customer pays. 

The representative APR that a lending company advertises must be the rate that more than half of their customers pay. The rate that each borrower is offered will fluctuate depending on your circumstances and requirements. You can use representative APR as a basic measure of how expensive a lender is.

What is the maximum APR?

Shorter-term loans typically incur higher APRs. These can range from around 390-780% APR. Many states in the USA have APR caps in place. However, for those states without a cap, exceptionally high rates are not uncommon.

Why is the APR for payday loans so high?

Payday loans are usually repaid over a much shorter term than traditional loans. This condenses the APR rate even if the cost is the same. As a result, payday loans are renowned for having one of the highest APR rates. Depending on the lender, these tend to average out at around 400% (around $15 to $30 per $100 borrowed). By contrast, APRs on credit cards can range from between 12% to about 30%. 

To find out more, see our guide: Why is the APR for Payday Loans So High?