Because, according to investorwords.com, “Annual Percentage Rate is the yearly cost of a loan, including interest, insurance, and the origination fee, expressed as a percentage.”

So why isn’t APR appropriate for determining the cost of a personal loan? In order to find the answer to that question, you don’t need to look any further than the term’s first word, which is Annual. Personal loans such as payday, installment, and car title loans ARE NOT annual loans, they are weekly and monthly loans. As such, these loans have weekly and monthly costs, NOT yearly costs. Therefore, annualizing these costs are not an accurate way of determining how much these personal loans will cost you. In fact, the only reason lenders display these inaccurately inflated APRs is because it is illegal not to.

So, how can you accurately determine what payday, installment, and title loans will cost you?

You simply calculate the cost per hundred dollars borrowed (interest), and then divide it by the original amount borrowed (principal) in order to find the interest rate. This is our Loan Cost Calculator, and the formula can be found below:

Cost of Borrowing/Amount Borrowed = Interest Rate of Loan

The lender is required by law to tell you the cost per hundred dollars borrowed, and that cost is usually how much it costs to borrow the money for 2 weeks. However, if you need to borrow for more than 2 weeks, simply divide the cost by 2 weeks and then multiply that cost by the number of weeks you need to borrow the money. For example, if you need to borrow for 3 weeks but the lender posts it’s rate per $100 borrowed in 2 week terms, your calculation would look like this:

(Cost of borrowing / 2 weeks) * 3 weeks = Cost of borrowing for 3 weeks

For example, if you borrow $100 for 2 weeks, and it costs $15 to borrow $100 for 2 weeks, you would calculate the cost of the loan as follows:

$15 (cost of borrowing for 2 weeks)/$100 (original amount) = 15% interest rate.

$100+$15 = $115 Total Repayment with principal and interest.

If you borrow $100 for 4 weeks, you would calculate the loan cost as follows:

$30 (cost of borrowing for 4 weeks)/$100 (original amount) = 30% interest rate.

$100+$30 = $130 Total Repayment with principal and interest.

Now let’s calculate the cost of a $500 loan for 2 weeks, and it costs $20 to borrow $100 for 2 weeks:

$100 (cost of borrowing for 2 weeks)/$500 (original amount) = 20% interest rate

$500+$100 = $600 Total Repayment with principal and interest.

So there you have it. Remember, payday, installment, and title loans are given for weeks and months, not years, so that means that APR calculations do not apply to them and are inaccurate in determining their costs. Hopefully this article and our Loan Cost Calculator formula will help you accurately determine the true cost of your next personal loan.

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If you answered payday loan, you are correct.

A recent FDIC study on bank overdrafts found that the average amount overdrafted by customers is $60, and that the average overdraft fee charged to those customers is $27, or 45%.

So, what does the average $60 payday loan cost you? $6, or 10%, according to the same FDIC study.

Another recent study published by the Community Financial Services Association (CFSA.com)  found that the average cost to customers with a delinquent utility account of $100  is charged $46, or 46%, in late and reconnection fees. The average $100 payday loan costs consumers $15, or 15% and is one-third the cost of late and reconnection fees.

The same CFSA study also found an average 37% late fee on a $100 credit card balance, and a 54% fee for a $100 check that was bounced.

So what does all this mean for you, the consumer? It means that if your options are a) bounce a check, b) miss a bill payment, or c) take out a payday loan, a payday loan is the least expensive option.

However, this is only true if you use the payday loan responsibly as a short-term financial solution, and pay it back on time. If you miss your payment or extend the length of your loan because you can’t pay, you are only harming yourself and your long-term financial situation due to the debt you will accumulate.

The Experts’ numbers don’t lie: responsible payday borrowing will save you money.

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Payday loans or cash advances are the best option, in most cases, if you want to borrow less than $1500 and are able to repay the full amount (principal and interest) by the second payday after you received the loan. They are ideal for covering unexpected expected bills, or avoiding overdraft fees or bounced checks. Depending on which state you live in, payday loans and cash advances have an interest rate of 15-25% per hundred dollars borrowed. To apply for a payday loan, click here.

Installment loans are the best options, in most cases, if you want to borrow more than $1000 and want to repay the full amount in multiple equal payments called installments, beginning 4 months after you receive the loan. Installment loans are ideal if you want to repay the loan in small amounts, instead of one large lump sum, and want to choose when you will repay the loan. Depending on where you live,  installment loans have an interest rate of 24-28% per hundred dollars borrowed. To apply for an installment loan, click here.

Car title loans are the best options, in most cases, if you want to borrow more than $1000 by giving the lender the ability to sell your car if you do not repay the loan. In order to receive an auto title loan, you must hold the title to your car, which means you must own it free and clear. Auto loans are ideal if you need cash but are unsure that you will be able to repay the loan in cash, but are willing to borrow against your car to receive the loan. The average car title loan has an average interest rate of 25% per hundred dollars borrowed. To apply for an auto title loan, click here.

Remember, none of these personal loans are intended to be long-term financial solutions. They are quick, convenient ways to receive cash for a short-term financial solution and should be used as such.

The FastCash4You Financial Network

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Payday Loan/Cash Advance – A Payday Loan or Cash Advance is an unsecured, short-term loan that is usually repaid on the borrower’s next payday. Typically, a customer uses a payday advance to cover small, unexpected, expenses between paydays to avoid expensive bounced-check fees, late bill payment penalties, and other less desirable short-term credit options. (source: Community Financial Services Association of America)

Installment Loan – An installment loan is a loan in which the amount of interest is added to the principal and repaid by the borrower in periodic payments, usually starting 4-5 months after the loan is received. The loan balance may not be increased during the life of the loan and the payments remain the same amount for the entire term of the loan. (source: Small Business Association of America)

Auto Title Loan – Auto Title, or Cash for Title loans are short term loans that allow you to pledge title to your vehicle in exchange for cash. However, in order to pledge your title to the lender, you must own your car free and clear. Should a borrower fail to repay, the lender sells the vehicle in order to recover the amount that was borrowed. (source: about.com)

Elastic loan – An unsecured personal line of credit repaid in installments that has an Access Fee of $2.50 per $20 borrowed, or 12.5%. (source: Urban Trust Bank)

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Thanks, and remember to always borrow responsibly!