There have been endless debates on how payday loans are unreasonably expensive, with references made to the logic-baffling APRs (Annualized Percentage Rates). Why would anybody acquire a loan when the interest rates are as high as 3000%? Unless you wish to convert a 30-day loan into a 365-day affair, the question actually makes little sense. A payday loan is a short-term option, and the loan duration is typically 30 days. However, loan regulations mandate a lender to include the annualized rate and not the actual interest calculated for the short-term, 30-day period. So, if you wish to borrow £100 for a month, you wouldn't take the APR figure into account to calculate your repayment amount. For the sake of understanding, the interest amount is usually between £20-£30 for the 30-day loan period.
In the case of payday loans, we are considering small sums of money. Hence, the interest, even if higher than a regular long-term loan, wouldn't burn a hole in your pocket. However, a debt scenario cannot be ruled out since borrowers sometimes seek extensions and roll the loan over several months. If planned and managed wisely, this situation can be avoided.
With plenty of misconceptions floating around, it is easy to get carried away and resort to payday loan bashing. If sky-high APRs are an issue, try asking yourself just one question – would you consider the annual rate of meat when you're looking to buy just enough to last you for a few days?
