How an Annual Percentage Rate (APR) is Calculated for Online Loans for Bad Credit
It's a fact that a no credit check loan comes with a higher APR than a loan that involves a credit check. An APR denotes the cost of a loan, regardless of its type. It includes fees along with interest charges, which is why it can represent the total cost of borrowing. Although not perfect, an APR is capable of acting as a standard for comparing fees and interest of different online loans for bad credit. This is why it's vital to know how it's calculated.
The APR Value for No Credit Check Loans
An APR enables a borrower to estimate the loan's cost in terms of a percentage. For example, an APR can be 15%, which means you pay $15 per $100 that you borrow per annum. The bottom line is that a borrower would always prefer a loan offer whose APR is minimum.
Loans can be a bit tricky, due to their APR specification. Lenders quote different percentages, which can lead to different interpretations. They may cover a few fees that you need to pay but conveniently omit them in ads. There are a few online lenders who are transparent in this matter. However, you still cannot say which one is more affordable. This is because of the varying fees as well as interest rates.
No credit check loans are infamously pricey. Although they are short-term advances with relatively low rates, their APRs can be problematic. At times, even the fees are fine when you need to an advance urgently. For example, you will happily pay $15 to obtain instant cash. However, when you view the same fees in terms of an annual percentage rate, it might seem big enough to force you to look for some other or better options to borrow.
Calculating the APR on Real Online Loans for People with Bad Credit
It could be tricky to evaluate APRs for online loans for bad credit. Still, there are a few simple ways to do it, which are as follows:
- Using an APR calculator online
- Using Microsoft Excel
- Calculating without any tool
Let's calculate an APR without using any tool. For instance, let's assume that you have chosen an online loan for bad credit offering $1000 for a fee of $100. The loan is repayable within 15 days. So, what will be the APR here? The Consumer Federation of America gives the following steps for calculating the APR on a payday loan:
- Divide the Fees by the Loan Amount: $100 / $1000 = 0.1
- Multiply the Quotient by 365: = 0.1 * 365 = 36.5
- Divide the Result by the Loan's Term to Get APR in Decimal Format: 36.5 / 15 = 2.433
- Multiply the Quotient by 100: 243.33% APR
This example assumes that the interest rate is fixed and charged only once a year and that there are no other fees. However, this is not always possible practically, which means that you will end up paying over $100.
So, an APR is annualized, which means it shows the amount of interest to pay for borrowing for the whole year. Nevertheless, you may not borrow for a year. It may also happen that the borrowed amount might change throughout the year. For example, this happens when you shop and pay using your credit card.
Usually, credit cards charge a small interest amount daily or monthly. When added to the loan balance, it simply means that you end up paying more because of compounding.
Using APR in Choosing the Most Affordable Online Loan Offer for Online Loans for Bad Credit
Considering the above discrepancies, it's a fact that you just can't rely on an APR to know the total cost of borrowing online loans for bad credit. It's essential to consider each charge or fee related to the loan offer that seems promising. Only doing so will help you in obtaining a good deal online.
Otherwise, you are likely to end up choosing an expensive offer. In case you are comparing lenders, consider the charges that they have included in their quotation. Moreover, it's important to look at the larger picture. In other words, for choosing the right deal online, it's essential to know how long you will use the loan.
For instance, it's okay to levy all charges at once or upfront and find out the total loan cost. However, while calculating an APR, it's assumed that these charges are sprinkled over the loan's lifespan. This is why the APR appears lower.
Note that any online loan for bad credit shall reveal two rates: Interest and APR. The annual interest rate is the charge for borrowing money without having any gray areas. However, while an APR includes other fees and is spread out over a year. So, both are different rates that almost all online loans for bad credit have.