Over the last couple of years Payday loans have become a major commercial activity suiting many people’s needs, but many more would be likely to use this type of facility is it was not for being scared off by the APR statements associated with them.
Is APR (Annual Percentage Rate) an applicable term for a cash advance (Payday Loan), well think about the basic principle , Take Wonga for instance, there setup was stated as:-
“interest will be charged at 1% a day – but you will only borrow cash for between five and thirty days. And that’s a crucial point. It’s a short term loan you pay back on a date that suits.Not only that but, unlike most short term loans, you’ll also be able to choose exactly how much you want to borrow, down to the last pound. As you make that decision, we’ll tell you how much the loan will cost you before you apply. For example, borrow £100 for ten days and it’ll cost you a tenner – £1 per £100 borrowed per day.”
A payday loan is, as you would think, a short term loan that’s available until your next salary is paid. Basic principal of the loan is to tide people over until their next payday with a fixed fee attached to the money borrowed to be paid back on the date of your next paycheck.
Legally Payday Loan providers must publicise the APR equivalent for their loan fees despite the fact they are never going to run for years or even one year, usually no more than one month, is this fair, well, it’s not good advertising for the loan providers as the APR’s normally look horrendously high, the legality is to allow a comparison across most finance providers, but again this is still very difficult as the makeup of APR can be complex (look it up on Wikipedia if you have a hour or so) anyway, getting back to the point, i would suggest NO, it’s not fair or applicable, and it’s not a comparison of “apples to apples” as such.
How would this type of thought train look in other markets:-
You want to get a taxi into town, it’s a couple of miles down the road, when you ask the taxi driver what it will cost the reply is £2100 from lands end to john o groats – Down at Tesco’s and you want a couple of nice steaks for dinner, how much for a Kg of prime rump, the response is £5600 per Ton? – Out with the wife for a day out and you decide to stop overnight, you drop in at a nice little hotel and ask how much is a double room for the night, only to be told, £21000 per year.
You get the general idea, it’s not a good indication of what is on offer if you want a specific time, weight, distance etc but can only be sold on a comparison against a much greater metric, so I would suggest that as far as uk payday loans are concerned a clear indication of total fee for the term of the loan is much more sensible than a non applicable APR statement.