APR & How it Affects Your Paycheck Advance

When you are getting a paycheck advance, you are told, the simple and easy way that you will have to pay for it: a flat fee per $100 that you borrow. If the fee is $13 per hundred, for example, and you borrow $300, you will have to repay a total of $300 plus the $39 fee. This method is easy and economically simple enough for most borrowers to grasp without having to worry about calculating interest payments, how much they will owe in the long run, accrual tables or anything else. What you borrow and what you pay back are two flat, easily defined numbers

The APR Calculation

Since the dawn of the modern loan more than 1000 years ago, the way lenders made money by lending it is off of interest – a fee added to the repayment amount that the borrower would have to pay. This interest is most often calculated as an APR or the annual percentage rate and represents how much in a percentage of the remaining balance that you will pay for your loan. Though the amount is calculated annually, it is computed monthly – meaning that though you may have a 12% APR on a loan, you do not pay 12% on the loan balance every month (you would actually pay 1% per month). When you send in your payment for a loan, the interest due on it is taken off first before the principal amount remaining is affected. This means that at the beginning of any long-term loan you are paying interest compounded (paying interest on interest, essentially), until your original loan balance subsides over time.

Since paycheck advances are very short-term loans, their APR, when viewed on paper looks dauntingly high, often a percentage number in the hundreds or possibly even thousands is presented as your APR. What that means is that if you were to actually pay that amount for the money you borrowed over the course of a year (annualized), you would be paying much more money than you would for a standard, conventional loan. Since most paycheck advances are over and done with in less than a month, the actual payment amount you make does not seem significantly overbearing.

Many states have laws in place now determining the maximum fee (calculated as APR) that a lender is able to charge for a cash advance. These fees were put in place to protect consumers from predatory lenders who would often charge exorbitant rates for their loans as they took advantage of the desperate.