Cash loans are, of course, available in various different forms and the APR, or "Annual Percentage Rate", that borrowers pay depends on the type of loan, how much is borrowed, for how long and the credit status of the borrower. In the case of traditional secured or unsecured loans, which are usually repaid over the course of years, the APR is the key factor. The APR takes into account the interest rate and some, but not all, of the fees associated with a loan. Lenders are legally obliged to disclose the APR of any loan product they offer, but the APR does not include charges for late or missed payments and for some types of loan the APR is not as important as it is for others.
Short-term cash loans, known as payday loans or payday advances, have become increasingly popular amongst consumers in the wake of the recent financial crisis. Payday cash loans offer the opportunity for consumers, even those with les than perfect credit ratings, to borrow a relatively small amount of money over a short period. The amounts involved are typically up to £750, repayable over a maximum of 31 days. As such, payday loans are not designed for major purchases, but can be useful for anyone who is faced with immediate, necessary expenditure, such as mortgage or rent arrears, outstanding utility bills or unexpected costs such as car repairs.
How Payday Loans are Repayed
Payday cash loans are designed to be repaid quickly and so attract a very high APR in order to make them profitable for the lender even if they are repaid as intended. The average interest rate charged on credit card borrowing, for example, is around 19% APR, but if such a rate was applied to payday cash loans over the typical term of a month or so the interest accrued would be too little to make lending the money worthwhile.
Payday loan providers therefore charge what appears, at first glance, astronomical interest rates of 1,000%, 1,500% or 2,000% APR or more. What borrowers need to remember, however, is that the APR is the interest rate that would apply if you borrowed the money for a year. Reputable payday loan providers are quite upfront about quoting the APR, as they should be, but both they and the Office of Fair Trading (OFT) are keen to stress that payday loans are not suitable for longer term borrowing and should not be used as a substitute for other cash loans or credit cards.
If a payday cash loans are repaid as intended, the actual cost of borrowing usually works out at around £25 per £100 borrowed or 25%. This is cheaper than an overdraft with a daily flat fee and can be a cost-effective alternative to bank penalty charges for returned cheques or direct debits, which range from £17 per transaction upwards on average. Not only can missed payments be costly financially, they can also damage your credit rating, which may mean that you have difficulty in obtaining credit in the future.
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