Whilst the actual cost of borrowing is reasonably standardised, the APR charged by lenders within the payday loan industry can be markedly different. Whilst this can confuse some consumers, it shouldn't be cause for concern. One of the major reasons that the representative APR differs is simply down to the way in which interest is charged. Whilst many companies have a standardised percentage that is applied to every loan, regardless of how long it's required (within a certain limit), others choose to add it on a daily basis. This can cause a huge disparity in the APR being advertised, with the flat rate appearing to be much lower - even if the cost may actually be higher. So what's going on? Well, as you probably already know, APR stands for Annual Percentage Rate, which, as the name suggests, is a calculation of the total interest over the course of a full year. Unfortunately, because payday loans are only available for a limited period, this figure isn't always the most accurate method for measuring the total cost. For instance, whilst the interest may be 1,200% APR, the actual cost might only be 20%. There is a clear disparity in these figures, but both are equally accurate. So how is APR actually worked out? Well, all lenders in the UK now need to display what is known as representative APR, which is the amount of interest charged to the majority of applicants. For payday loan companies, particularly those charging daily amounts, this poses a further hurdle. However, the actual calculation process is relatively simple. Because it is an annual rate of interest, the monthly, weekly or daily rates are added to create the yearly figure. As mentioned, long-term personal loans will generally charged around 1% per month, which equates to 12% APR. However, as a rate of 25% can be charged per month or 1% for each day within the payday loan industry, this equates to much more over the course of a year. Therefore the final APR figure is representative of somebody who borrows money, only to continuously default and roll-over their repayments for a full year. So if you were to borrow £100 from a lender who charged 25% and repaid on time, the total cost would be £125. Now, if that same lender had a representative APR of 1,200%, as in the earlier example, you'd have to find £1,300 by the end of the year. However, this is extremely unlikely and most lenders will have strict policies on how many times you can default to ensure that debts don't ever become unmanageable. Therefore, with the different ways in which payday loan lenders charge customers and the additional fees applied to each successful application, it's hardly surprising that there is very little consistency within the APR advertised by each company. Unfortunately it's not the best indication of how much you'll pay either. So anybody who is looking to secure a payday loan would be well advised to check the terms of individual lenders and calculate the actual cost, rather than using APR as a primary metric for comparison. Article Source: http://EzineArticles.com/7037444