Why the APR of Payday Loans Doesn't Matter Why the APR of Payday Loans Doesn't Matter

By Isaac Juarez

June 26, 2013

Getting a payday loan sounds more and more like borrowing a financial ticking time bomb than money.

Most media coverage talks about how “this legislation” or “that legislation” will curb or ban payday loans. This war on payday loans has been waging across the country ever since the cash advance lending industry began booming in both the online and offline realms.

Politicians have been forced to define their positions on the matter, some claiming support, while others fight against short-term loans for people in need.

However, politicians aren’t the only voices in this debate.

Aside from politicians and the cash advance industry, consumer activists are the third voice in this three-party scuffle. One argument that consumer activists constantly use against borrowing payday loans is the high annual percentage rate (APR) that comes with obtaining these types of financing. However, calculating the APR of cash advances is a completely erroneous use of interest rate calculation for a loan lasting a matter of days.

The first casualty in a war is Truth, and in the Payday Loan War that idiom unfortunately proves to be accurate.

APRs and Interest are Apples and Oranges

Payday loan APRs can be quite high on paper, but their importance for short-term loans is massively misleading. Unfortunately, anti-payday loan voices often disregard the true correlation (or lack thereof) between annual percentage rates and cash advances.



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