Understanding what an APR is and how it’s calculated can be useful when you apply for a payday loan.
APR stands for annual percentage rate – the annualized representation of your interest rate to be more precise. In other words APR display cost of credit during the year. APR is related to all types of lending, including payday loans.
According to federal Truth in Lending Act the lenders must disclose the full cost of the loan in dollar amount and APR in writing before you sign the loan agreement.
How to calculate APR
APR can be calculated in many different ways, thus means dramatically different rates. Real life cases show that rates can vary from 4% to 400%. Cruel? It’s all about risk management.
The reason for such great difference lies in lenders risk management algorithms. Let’s take a look at the APR calculation formula:
The basic to every loan rate is the U.S. Prime Rate – this one established by the central bank and fixed for all cases. The second part of APR is lender margin – a multi-component and heavily estimated number.
Lender margin usually includes two essential parts: cost of risk and lender profit. Cost of risk is the reason for APR diversity. The value of this parameter is so significant that borrowers can get different APRs from the same lender!
What influences the cost of risk? Various parameters such as credit amount, length of the loan, availability of pledge and it’s quality, the credit history of an income of the borrower. Lenders can also take into account various less significant factors. So, if you want to decrease your APR you should be a nice person for lender risk algorithms.
APR in 2019
We are living in a world when technologies play a significant role. Every year more and more lenders use Big Data in loan application evaluation. So, the influence of your activity on the Internet and social networks in your APR evaluation will grow.
What is the interest rate on a payday loan
Payday loan percentage can be much higher from other types of credit and the reason is in higher risks for a lender. On another hand, there are many advantages to a payday loan borrower including convenience and speed.
Some local authorities limit payday loan APR but in most states with 36–40% generally the normal cost for such credit. In some cases payday loan APR may exceed 400% and more. All depend on lender terms and conditions of the borrower.
Some types of lenders, like the military, can get special protections against high fees or rates.
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