When it comes to the cash advance charge, that is something that a lot of people think is higher than it actually is. Which is unfortunate because it can put some people off when in reality it might be the best thing to get for their situation. All of the confusion comes about due to the APR.
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.
Usually the APR is a useful figure to know when you are considering a loan, but only if the loan is going to last a year or more. If it lasts for less than a year then it just has to extrapolate up and assume that you are not going to repay on time. So really the APR on short term loans should just be there to tell you that you you should make sure that you do repay on time.
In actual fact, although people are often shocked by the APR when they first see it, they don't really expect to have to pay that much. But they still think that it means this is bound to be an expensive loan, there seems to be no justification for the fact that it is such a high rate of interest.
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.
Actual Interest Rates
Hopefully then with the above analysis you can see why it's not a good idea to use the APR to judge how expensive a cash advance is at all. So with that being the case, what should you use? Well, since you're going to be paying it all back at one time the best thing to do is simply to look at the total amount that you are going to be charged.
If you can find a lender which if charging around 25% interest then that's a very reasonable deal. That's despite the fact that these loans only last for a month, and if you're thinking that it's a lot for a month then you are probably still in the mindset of thinking about long term loans. When a direct comparison is made again though, you can see that 25% is actually reasonable.
When considering long term loans there is going to be a lot more variation involved. That's because not only are the lenders going to be charging different interest rates but they'll be offering loans that last for different lengths of time. If you get a 3 year loan at 20% APR then you'd be paying 60% overall, whereas a 5 year loan at 15% APR would be 75% overall. This is quite typical so 25% overall for a short term loan is not actually that bad.
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.
Usually the APR is a useful figure to know when you are considering a loan, but only if the loan is going to last a year or more. If it lasts for less than a year then it just has to extrapolate up and assume that you are not going to repay on time. So really the APR on short term loans should just be there to tell you that you you should make sure that you do repay on time.
In actual fact, although people are often shocked by the APR when they first see it, they don't really expect to have to pay that much. But they still think that it means this is bound to be an expensive loan, there seems to be no justification for the fact that it is such a high rate of interest.
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.
Actual Interest Rates
Hopefully then with the above analysis you can see why it's not a good idea to use the APR to judge how expensive a cash advance is at all. So with that being the case, what should you use? Well, since you're going to be paying it all back at one time the best thing to do is simply to look at the total amount that you are going to be charged.
If you can find a lender which if charging around 25% interest then that's a very reasonable deal. That's despite the fact that these loans only last for a month, and if you're thinking that it's a lot for a month then you are probably still in the mindset of thinking about long term loans. When a direct comparison is made again though, you can see that 25% is actually reasonable.
When considering long term loans there is going to be a lot more variation involved. That's because not only are the lenders going to be charging different interest rates but they'll be offering loans that last for different lengths of time. If you get a 3 year loan at 20% APR then you'd be paying 60% overall, whereas a 5 year loan at 15% APR would be 75% overall. This is quite typical so 25% overall for a short term loan is not actually that bad.
About the Author:
More writings on payday loans by author Bailey Saunders can be sought out at Cash Advance.
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