What is all the confusion about payday loans? The process of getting one is not confusing. There is an easy application which does not take much time to fill out. No credit check is another aspect which speeds things up. So if a person who has bad credit can still get help with a small short-term direct payday loan, wherein lies all the confusion?
Read a story about a payday loan online or from a storefront, it all reads the same; exuberantly high APRs create money traps for people who use short-term loans. In order to start to unfold the confusion for APR and payday loans, then we need to understand each component.
What is APR? Annual percentage rate describes the interest rate for the whole year. The amount per pay period is multiplied by the amount of payments in one year to get the APR. An effective APR will include any fees which are charged for the loan. A payday loan will have fees attached to the loan amount to be paid off in one payoff period. The loan term is set up based on your pay cycle. If you get paid once a month, then you will have till then to come up with a payment. If your get paid bi-weekly, then your pay period is set for two weeks. On average, the typically low cost payday loan term is set for about 14 days. When calculating APR, the total is higher with more pay periods in a year's time. Thus we get extremely high APRs for payday loans.
Other creditors who bill monthly will have their APRs calculated for 12 payments a year. Their term interest rate is usually lower as they expect the payments to be drawn out over a few years. They can afford to set the rate low because of the longevity of the payback period. They earn their revenue over time.
An online loan is meant to collect over the short-term, therefore there are fees attached to the one and only set payment period. When the loan is extended, the interest will accrue for each following terms. The longer you keep out a short-term loan, the more you will end up paying. This extra payment is much larger than other creditors because of the higher term interest rate. These short-term loans are not set up to be kept out over a year's time. There is no credit check to rate a borrower's capability of making payments over the long-term.
Those people who do end up taking a year to pay off a short-term loan, misjudged their budget when applying for an online payday loan. As much as they can be helpful to people with a need for quick cash, they can be detrimental to those who do not consider the urgency for a fast payoff.
There are guidelines to be followed to not only protect the lender, but the borrower as well. Debt problems are tough enough to get out of with low interest debt, add on loans with high interest and a budget can be totally blown out of the water. Decide what money option is best for your long-term needs before you sign for a loan with any company.
