Payday Loans are ideal if you are in need of some month end money in the form of a loan until payday, where you just need to borrow a small amount of cash for a relatively short period of time and can afford to repay it once you’ve been paid. However, due to the short-term nature of the product, loans til payday have high APRs, which they are regularly criticised for. As a payday loan company, we would like to point out the inability of APR to provide a clear picture of the true costs of borrowing for short term cash loans.

APR (Annual Percentage Rate) was designed to enable customers to compare credit products. However, while it is helpful when you compare like credit offerings, it is extremely unhelpful when you compare different offerings.

APR is limited

If, for example, you are comparing two loans with the same value, and the same loan duration, APR will enable you to compare the cost of borrowing and can then help you to decide which loan would cost less and, therefore, be favourable. If, however, you compare loans with different variables, such as comparing a £200 loan until payday, with a loan duration of a month, with a £3,000 loan, with a loan duration of a year, using APR will not provide a clear picture of the true cost of credit. Comparing these loans is like comparing apples with oranges.

We, as a payday loan company, advocate that, when comparing different loans, you need to consider how long you need the money for, and how much you want to borrow, and then assess how much the loan will cost you after it has been repaid in full. You are then in a position to consider whether the benefits of the loans in question outweigh the cost of the credit.

Don’t be fooled by APR

The APR will be lower the longer you borrow the money for. Therefore, if you compared the APRs of two loans of the same value over different periods of time, it would appear that you would get a better deal when borrowing the money over a longer period of time. However, the actual cost of the credit would be more because you would have had to pay more in interest for the same amount of cash.

The following example clarifies this. If you bought a product costing £199.99 on credit and spread the cost over 12 months you would have paid interest on the amount each month. With an APR of 218.4%, at the end of the 12 month period you would have repaid a total of £354.43. This means you will have paid 77% on top of the initial cost of the product. If, on the other hand, you took out a £200 loan until payday, for a period of 24 days, you would need to pay £50 in interest, and the APR would be 2884.3%. This APR is staggering. However, rather than paying back £354.43 for a £199.99 loan you would pay £250 for a £200 loan with the payday loan advance. This is more than £100 less in interest, despite the fact that the APR is massively higher! While the APR on the payday loan advance is significantly higher, the actual amount of money you re-pay is much less in this example, since you repay the loan in full after a month, with one interest payment.

If you actually wanted to borrow the cash for the period of a year, then the 12 month loan would still be preferable to the loan until payday. However, if you only need the money for a short period of time and can afford to re-pay it on your next payday, then the payday loan advance option may actually be better, in spite of the higher APR.

APR will be higher the less time you borrow the money for. Since you tend to borrow the money for less than a month with loans till payday, as you borrow it between paydays, the APR will always be high. However, if you don't need to borrow the cash for a long period of time, then why pay more money in interest in order to have a longer loan duration; why not just get a loan until payday, which enables you to be debt free as soon as it's been repaid on your payday?

For the clear picture look at the true cost of credit - not APR

Payday loans lenders stress that you need to establish what the true cost of credit is and whether you are happy to borrow cash at this cost, rather than simply looking at the APR. You may not want to take out a larger or longer term loan. It might, when comparing APR look to be a more favourable offer than a small short-term payday loan, but may not actually be cheaper when you consider the total amount repaid in interest.

Representative Loan Example

If you borrowed £80 for 28 days you would repay £100, with an interest rate of 25.0% fixed. 1737.2% APR representative. All loans are subject to status and affordability. Customers must be over 18.

We believe that, if you are happy to re-pay £20 for every £80 cash you borrow, at a 25% cost of credit, and can afford to repay the loan on your next payday, then it needn't matter what the APR is, since loans till payday are short term loans and APR is an annualised rate.