From credit card statements to bank ads, APR notices are displayed on just about everything financial. But what is APR – and why is it so important?
Annual Percentage Rate (APR) is a percentage that represents what it would cost to borrow money over one year’s time. Whenever you take out a loan or some other type of credit, the federal government requires the lender to disclose the interest rate, fees and other information, including the APR.
Loans and other types of credit products often have different interest rates, fees and terms (the amount of time the borrower has to repay). For example, one lender might charge a 22% interest for a 6-month installment loan. A credit card company might charge 15% interest, plus a $50 annual fee, plus a $35 fee for each payment that’s made late. Those differences can make it tricky to compare different products and the true cost of borrowing for each..
That’s where the APR comes in. Through a fairly simple APR formula, it takes all those charges and turns them into a comparable percentage rate so borrowers make “apples to apples” comparisons among products and lenders. That’s a good thing, for the most part. But there are also times when an APR may tell only part of the story.
Comparing late fees and more
A 300% APR (or higher) can sound unreasonable, without a little context. It’s important to keep in mind what that actually means when it comes to payday loans (like the kind you can get at Check `n Go). The term of a payday loan, from the time you receive your loan until it’s time to pay it back, is typically about two weeks. The flat fee a payday lender typically charges on a two-week payday loan is required to be prominently expressed as an APR in the loan agreement, even though the loan term is much less than a year.
If you compared and explained other common fees in terms of APR, you might be shocked to see that a payday loan fee can often have a much lower APR than some other common types of fees. Consider these APRS:*
- $100 payday loan with a $15 fee = 391% APR
- $100 bounced check with $54 nonsufficient funds/merchant fees = 1,409% APR
- $100 credit card balance with a $37 late fee = 965% APR
- $100 utility bill with $46 late/reconnect fees = 1,203% APR
*Fees on payday loans and other products vary depending on the specific product, state and other factors.
Putting APRs into perspective
Looking at those examples, it’s easy to see how expressing some fees in terms of an APR can be alarming. But when expressed as a dollar amount borrowed over two weeks’ time, a one-time payday loan fee may not look so scary – especially in comparison to some of the other fees mentioned above. If unexpected money needs have you running a little short, remember that a payday loan* from Check `n Go may be a cost-effective choice compared with a bounced check or a late credit card payment. We’re here to help.