Why does the APR seem high when compared with other loans, credit cards and mortgages?

All lenders have to tell you what their APR is before you sign an agreement. The APR for payday loans is certainly higher when compared with other forms of borrowing.

However, an APR is calculated based on paying a fixed amount of interest annually and are an accurate measure for comparing the cost mortgages and personal loans where you would usually borrow over a period of a number of months. Payday loans are taken for a maximum term of 31 days, and so Annual Percentage Rates are not so effective as a measure to compare how competitive rates are.

For short term cash loans it can be better to look at the amount you pay back in total rather than the APR.

The following examples illustrate how to compare on APRs and the actual cost of a loan:

Example unsecured loan Borrow £5,000 over 60 months Typical APR 23.1% Repay £8109.88 after 60 months The total interest cost is 62% of what you borrowed

Example unauthorised bank overdraft Borrow £200 for 30 days at a flat fee of £5 a day Typical APR 90,888.9% Repay £350 after 30 days The total interest cost is 75% of what you borrowed

Example online payday loan Borrow £200 over 30 days Typical APR 1,413.1% Repay £250 after 30 days The total interest cost is 25% of what you borrowed

With the unsecured personal loan in the example above, the APR is low but the actual interest charge over the 60 month period would be £3109.88 which amounts to 62% of the amount borrowed. With the payday example, the total interest charge equates to 25%.

The Consumer Finance Association (CFA), which represents short term personal loan providers, is calling for action to make the cost of loans transparent and easy to compare. The organisation believes in the case of short term borrowing, APRs can be misleading for showing the actual cost of a loan.