It is frightening. A consumer goes to a payday loans website to apply for a loan and they immidiately see an APR of up to 4500%. This in itself disuades many people from getting the loan they need. Is it in fact a fair measure of what the person would really pay back? Absolutely not! By law, the payday loans companies are required to report APR even though the length of the loan is usually between two to four weeks.
Annualising the interest cost of a product that is only offered as a short-term facility confuses the purpose of the loan and misrepresents the true cost. because the law requires that apr must be calculated, even when a loan is not taken out for a year, the interest rate must be compounded the same number of times the actual loan period would fit into a year. Calculating APR for short term loans is not an accurate measure of the actual interest rate of the loan.
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