APR is a measure designed to help customers compare different credit offerings. However, as helpful as this is when comparing like products, it is just as unhelpful when comparing different products.
For example, if you are comparing two loans for the same value, taken for the same length of time, APR is a brilliant means of calculating the cost of borrowing and helping you to decide which one would cost less and, therefore, be preferable. However, if you are comparing loans with different variables, for example a £200 loan taken for the period of a month to a £3,000 loan borrowed for the period of a year, using an Annual Percentage Rate (APR) will not necessarily give a clear picture of the cost of borrowing. These loans are not exactly comparable; it’s similar to comparing apples with oranges.
What you need to consider when comparing different loans is what you want the loan for, how much you want to borrow, and how long you need the money for. You then need to look at how much the loan will cost you and consider whether the benefits outweigh the cost of credit.
APR will be lower the longer the money is borrowed for. So, even if you were to compare APRs when borrowing the same amount of money over different periods of time, it would seem on the surface that you would get a better deal when borrowing the money over a longer period of time. However, the actual cost of credit would be more because you would have paid more in interest for the same amount of money.
A simple example clarifies this. If you decided to take out a credit finance deal to buy a product costing £199.99 and spread the cost over 12 months, with an APR of 218.4%, you would pay interest on each monthly amount. If the total repayment at the end of the 12 month period totals £354.43, you will have paid nearly 80% on top of the cost of the initial product. On the other hand, if you took out a one month loan for £200 from a payday lender, where the interest payment is a total of £50, and the APR is 1286.1%, instead of paying back £354.43 for a £199.99 loan you would pay £250 for a £200 loan, which is more than one hundred pounds less in interest. Although the APR on the Payday Loan is higher, the actual amount of money you re-pay is far less because there is only one interest payment before the loan is paid back in full.
Obviously, if you wanted to borrow the money for the period of a year, then this option may still be preferable to you. However, if you need the money for a short period of time and can afford to pay it back within a month, then the second option may actually be better, in spite of the significantly higher APR.
In many instances the APR for payday loans is even higher than 1286.1% because you invariably borrow the money for a month or less, paying it back on your payday. The less time you borrow the money for, the higher the APR. However, you may not need to borrow the money for a long period of time and to pay more money in interest in order to do so.
You need to consider what the cost of credit is and whether you are happy to borrow money at this cost, rather than simply looking at the APR. You may not want to take out a larger or longer term loan, which on the surface looks to be a better offer than a small short-term loan, based on APR.
If you are happy to pay £20 for every £80 you borrow, at a 25% cost of credit, and this short term finance is right for you, then it shouldn’t matter what the APR is.
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Payday Express offers a fast, effective service which is completely confidential. Range of loans includes payday loans, bridging loans and cash advance loans. They understand how costly life can be and how long the wait is until the next payday.
Notes for Editor:
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