If you are looking for a cash advance then one of the things that you are going to be interested in is how much they cost. In this article we will take you through how to judge how expensive short term loans like this are, which is made more complicated by the inclusion of the APR in the advertised rate.
What's the APR?
There are two things that you have to know if you are going to understand why the APR is not representative of how much you are going to be charged for a cash advance. One is that these are short term loans which are designed to last for about a month. The other is that the Annual Percentage Rate measures how much interest you'd have to pay in a year.
With the majority of conventional loans, that is long term loans that last for at least a year, it certainly is useful to know the APR. Because that way you can calculate how much you're going to have to pay each year, which is helpful when you're considering your accounts. If the loan doesn't last a year though it just tells you how much more you take that much longer to repay the loan.
Of course most people understand that the APR is not what they are going to have to pay if they do pay back the loan on time but they still don't understand why the APR should be that high. That is because they have the mentality surrounding long term loans though, in which case a year would only be a fraction of the length of the loan. Whereas with a loan that lasts for a month, a year represents 12 times longer than the length of the loan.
The problem here then is using months and years as fundamental units of times, whereas they are really quite arbitrary and not universally useful. In this case what we have to do instead is use the length of the loan as the unit of time that we are using. So a year is 12 times longer than a month, which is the relationship between the APR and cash advances. To compare this to a 2 year loan then, the equivalent of the APR would be the amount of interest you'd have to pay after 24 years.
Real Interest Rates
This has demonstrated why using the APR is not a good way to judge a cash advance, so what is a good way? Well, it's to look at the total amount of interest that you are going to have to pay. After all you are going to have to pay all of that along with the principal loan amount in one go, when you're next paid.
At this point of course no universal statements can be made as it is up to each individual lender how much they charge so you are just going to have to check out different providers and see what the fee is. If you find a provider offering around 25% though, that is a good rate. Again, we can compare that with long term loans directly by seeing how much they charge overall.
There are going to be large differences in the amount you are going to be charged overall by long term lenders due to the fact that their loans not only come with different interest rates but they also last for different amounts of time. For instance if you have a loan that lasts for 2 years at 15% APR, that will be 30% overall. Whereas if you have a 5 year loan at 20% that's 100% overall. Clearly then, a short term loan at 25% is actually quite good.
What's the APR?
There are two things that you have to know if you are going to understand why the APR is not representative of how much you are going to be charged for a cash advance. One is that these are short term loans which are designed to last for about a month. The other is that the Annual Percentage Rate measures how much interest you'd have to pay in a year.
With the majority of conventional loans, that is long term loans that last for at least a year, it certainly is useful to know the APR. Because that way you can calculate how much you're going to have to pay each year, which is helpful when you're considering your accounts. If the loan doesn't last a year though it just tells you how much more you take that much longer to repay the loan.
Of course most people understand that the APR is not what they are going to have to pay if they do pay back the loan on time but they still don't understand why the APR should be that high. That is because they have the mentality surrounding long term loans though, in which case a year would only be a fraction of the length of the loan. Whereas with a loan that lasts for a month, a year represents 12 times longer than the length of the loan.
The problem here then is using months and years as fundamental units of times, whereas they are really quite arbitrary and not universally useful. In this case what we have to do instead is use the length of the loan as the unit of time that we are using. So a year is 12 times longer than a month, which is the relationship between the APR and cash advances. To compare this to a 2 year loan then, the equivalent of the APR would be the amount of interest you'd have to pay after 24 years.
Real Interest Rates
This has demonstrated why using the APR is not a good way to judge a cash advance, so what is a good way? Well, it's to look at the total amount of interest that you are going to have to pay. After all you are going to have to pay all of that along with the principal loan amount in one go, when you're next paid.
At this point of course no universal statements can be made as it is up to each individual lender how much they charge so you are just going to have to check out different providers and see what the fee is. If you find a provider offering around 25% though, that is a good rate. Again, we can compare that with long term loans directly by seeing how much they charge overall.
There are going to be large differences in the amount you are going to be charged overall by long term lenders due to the fact that their loans not only come with different interest rates but they also last for different amounts of time. For instance if you have a loan that lasts for 2 years at 15% APR, that will be 30% overall. Whereas if you have a 5 year loan at 20% that's 100% overall. Clearly then, a short term loan at 25% is actually quite good.
About the Author:
If you are in a situation when you require payday finance, go to cash advance to get the very best interest rates. You can see more writings by Evan Matthews there.
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