By and large, if the APR is low, then the loan should be cheaper. This is certainly the case when it comes to long-term loans. However, in the case of payday loans, this isn’t necessarily true.
Whilst the interest rate might be significantly lower than other providers, charges could well be much higher. This is where reading the fine print and calculating all costs is so important. Fees are relatively standard, although most companies will only charge a few pounds to cover the transfer process. However, under no circumstances should you pay anything upfront. Whilst this wouldn’t be an issue in an ideal world, some unscrupulous lenders are still looking to rip-off desperate consumers. There should be nothing to pay until you have had the chance to apply and accept a proposal.
Another issue with APR is that it doesn’t necessarily take into account the length of time that you require the loan. As an obvious example, those who charge a flat fee on all loans will always have a lower APR than any that appy interest daily. In this regard, its primary advantage is also its biggest in so far as it is calculated on the basis of borrowing for the full duration, rather than shorter periods. But if you were simply looking for a little cash to get you through to the end of the week, the likelihood is that it would be significantly more cost-effective.
Let’s take a look at how this works out. Standard payday loans with a set interest rate are generally charged at around 20 to 25%, whilst the more versatile alternative is likely to cost around 1% a day. Let’s say you just want a loan for a week, the standard payday loan would still be 25%, whilst a flexible daily option would actually only be 7%. In this example, the more flexible payday loan would be the cheapest option. Of course the situation will immediately reverse whenever the lending period is extended, but this is why it is important that you take all factors into account before you come to apply for a loan.
As this previous example has ably demonstrated, APR isn’t a particularly effective measurement when it comes to short-term borrowing. Very few companies offer rates below 1000%, which is why they come in for so much criticism. The true cost of borrowing is significantly lower of course, with APR skewing this. This is why it is so important that you take the time to look at other factors and determine the true cost of borrowing before you do anything.
Of course, in a like for like comparison, lenders offering lower APRs should be cheaper, but even this could be a simplification too far. As a general, initial measurement it certainly isn’t the worst to use. However, it is important that you take a wider view, taking into account the levels of service that they provide for customers and their reputation within the industry. The cheapest company might offer lousy service that actually ends up costing you more in the long run. Therefore, don’t allow yourself to be hoodwinked by a headline APR figure, find out what it will actually cost you and make an informed decision on that basis.