One of the claims you hear about payday loan companies is that the APR charged for payday loans is a lot more than 100 percent per year. There is a truth to it but only when you have one view. This supposedly high interest is why the financial reform bill calls for more restrictions on payday lending. Seems like like this is just trying to fix what isn’t really the problem.

Article Resource: Claims of high interest from payday loan store involve bad math [1]

What actually is APR?

APR actually stands for Annual Percentage Rate. APR could be calculated a lot of different ways depending on the standard for your country and institution. Anyway, the way the figures for the fees for payday lending are calculated, as outlined by prnewswire.com:

APR = [(interest rates or fees/amount being loaned) X (days of one year/the term of the contract)] X 100.

So a person borrows $ 200 and is then charged $ 15 for a loan due in 14 days.

$ 15/$ 200 = 0.075

365 days/14 days = 26.0714

Now, we multiply those two figures:

0.075 X 26.0714 = 1.955

Multiply what you get there by 100: 1.955 X 100 = 195.5 APR

Now, the going assumption is that this APR rate would compound over and over were the loan to extend over the entire year, which it certainly doesn't. This loan is only for 14 days, not 365.

APR in a more accurate picture

It would like this when taking the view of paying $ 15 each and every two weeks of the year:

$ 15 each two weeks with 52 weeks per calendar year. There are 26 two week periods per year, so:

$ 15 X 26 yearly two week periods = $ 390 total interest

Now if we were to divide the total interest by the principal:

$ 390/$ 200 = 195 percent

Although the 195 percent matches the figure above, one who gets a payday loans no faxing or cash now of $ 200 with a $ 15 fee will only be paying $ 215, not $ 390.

So looking the sum total:

$ 200 $ 15 = $ 215 Less the principle for the main difference in total paid:

$ 215 - $ 200 = $ 15

Divide that by the principal:

$ 15/$ 200 = .075, or 7.5 percent

That isn’t usurious at all

Easier targets

Unlike payday loans, credit card interest does compound monthly. You also are never going to close that credit card after opening it for two weeks. Thinking in those terms, are we sure that government should be regulating payday lenders with the financial reform bill before other forms of consumer credit?

Find more information on this topic

Annual Percentage Rate

http://en.wikipedia.org/wiki/Annual_percentage_rate

prnewswire.com

http://www.prnewswire.com/news-releases/the-truth-behind-the-numbers-what-aprs-really-mean-explains-pay1daycom-94574259.html