Understanding Payday Loan Interests

If you are in dire need of money, a payday loan may be a viable option. You just need to remember two things about payday loans – it entails higher interest rates and it should be repaid when you receive your next paycheck.

If you are concerned about the interest rates, it is time that you understand it more. Here are the things that you need to know about payday loans like wonga:

What is an interest rate?

Interest rate is the most important parameter in considering payday loans. Interest rate is the amount that a lender charges for the use of assets, which is expressed in percentage of the principal. You must know that the interest rate is typically noted on an annual basis. It is called APR (Annual Percentage Rate).

What are the problems with APR?

In Britain, it is the duty of banking institutions or lenders to publish “Representative APR”. When you compare APR, it can still provide an inaccurate picture that is why you need to pay attention to this before you take on a loan.

Typically, a loan with 1000% APR is 10x more expensive than a loan with a 100% APR. However, this only applies if you take on a loan for a full year. For short-term loans like payday loans, the difference between APR for one month and for a few months is less than 10x.

When you compare APR, it will depend if the loan is compound or non-compound. Compound loans are calculated based on the principal amount and the accumulated interest in the preceding periods. A non-compound interest uses simple interest, which is calculated based on the loan’s principal amount. You must know that APR cannot compare these two types of loans.

What are the three factors of payday loan interests?

  • Loan amount: the interest will depend on the loan amount. For instance, a £100 loan will cost little as far as interest is concerned but a £1000 loan will cost you more.
  • Time period: you should be aware that interest not only depends on the size or the amount borrowed but also on the time period. For instance, a one-month loan will cost you little but a five-year loan will definitely cost you more. Keep in mind that the duration and loan amount are not controlled by the lenders but by the borrowers. When you compare different loan offers, it is crucial that you compare short-term loans of the same amount and for the same period.
  • Rate: the last factor that you need to consider is the rate. This will determine how much interest you need to pay. The rate is the only element that is controlled by your lenders. Of the three factors, the rate is the most important. With this, you need to keep an eye.

Final words

Since payday loans entail higher interest rates, it is crucial that you make a comparison at the onset so you can find the ideal lender. Your goal here is to find the right payday loan that you can suit you best. With this, due diligence goes a long way.

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