Finance Insights: What is an APR?

Taking on the APR and Finance Charges for your Credit Line

While taking credit, whether it be through a credit card, a home equity credit line or a cash advance, you will come across the terms APR and finance charges. It is very important for a borrower to understand these terms correctly, especially the APR or Annual Percentage Rate.

An APR is meant to provide the potential borrower of funds a means to shop around and compare various credit products. Simply stated, it is the cost of credit. More explicitly, the APR represents the interest rate you pay if you carry an unpaid balance for purchases or take out a cash advance. It is important to remember that APR is calculated on a yearly basis, as opposed to monthly rates. An APR of 18% implies that the monthly finance charges will be 1.5% of the opening balance.

The higher the APR, the more you can expect to pay on your line of credit, in real terms. Further, APR is calculated over the total time period of the loan, and will change if you plan to pay back sooner. Additionally, an APR is subject to change, even if it is termed as ‘fixed’, though you will be informed prior to the change.

The standard APR for cash advances varies depending on your location, but some Bloomberg estimates place it around 390%, though it can go as high as 600%.

Finance Charges can be explained as the dollar amount you will pay to use credit, based on the balance outstanding currently, the APR and the time period. It is essential for you to know how your particular card company calculates finance charges, since this will affect whether you end up paying less or more. Typically, the method will be one of the following four:

Previous balance – will apply the monthly finance charge on the opening balance for the billing cycle, implying that purchases, advances or payments during that cycle are not included.

Ending Balance – As implied, the finance charge is applied on the ending balance of the billing cycle, which will include purchases, advances and payments made through that cycle.

Adjusted Balance – ensures that you pay a lower amount in finance charges since the payments made during the billing cycle are subtracted from the opening balance and thus reduce this figure.

Average Daily Balance – is widely used and entails the addition of each day’s balance during the billing cycle, averaged over the number of days in the cycle.

Also, be aware that some loans carry a minimum finance charge that will be applicable even if your month’s finance charge amounts to less than that figure.

CBS Evening News: Payday Loans and US consumer debt

Have you heard that nearly 2600 Americans a day are filing for bankruptcy? Many Americans in need are turning to payday loans. The problems documented in the industry are well known and truly stated by the media, but not always a true statement of truth. The biggest mistatement involved the APR, that is usually touted as being over 300 - 500%. These numbers are truly stated but not statements of truth. If they were true, banks that charge outrageous fees for late credit card payments and bounced checks should also be thrown under the bus. As always study the truth about cash advance payday loans for yourself before you borrow any money from anyone.

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Pennsylvania's new law aimed directly at online payday lenders

Last week, Pennsylvania lawmakers set out to make the online payday lending playing field on par with their brick and mortar counterparts. In a continuing trend, many state legislators are seeking to bring some regulation to the payday lending industry. The Morning Call reports:

''This is a major victory for Pennsylvania consumers,'' Kerry Smith, a lawyer with Community Legal Services in Philadelphia, said following the announcement Monday.

Until last week, Pennsylvania applied its Consumer Discount Company Act only to lenders that had a storefront in Pennsylvania. Under a new interpretation, the act now will apply to anyone making consumer loans.

The act limits the interest and fees a non-bank company can charge for small loans. That's trouble for payday lenders, whose short-term loans, if applied over a year, would far exceed the act's interest-rate caps.

The issue is a bit moot in that payday lenders can set up offshore and avoid regulation altogether. Much like online casinos. Whether that will occur or not is to be seen in the future.

Also read the Supreme Court's decision on the Advance America lawsuit.

Northern Michigan Covers Cash Advance Loans

With legislation in the Michigan legislature as we speak concerning the payday loan industry, it was interesting to see the coverage of Marquette's WLUC concerning the payday loan industry.

MARQUETTE -- Payday loan companies have been in existence for about fifteen years, and sometimes there is a stigma attached to their business. However, many people definitely feel a need for small, short-term advances that most banks don't offer, particularly to those with bad or no credit.

All cash advance agencies must be licensed by the state and are subject to monitoring to insure proper operating practices. They also fall under the purview of the Truth in Lending Act, which means they must disclose any fees or interest rates charged to their customers. Also, they no longer allow people to roll over their loans, which protects consumers from getting in over their heads in debt. Natalie Zimmermann reports the story.

Are Payday Lenders to Blame for Consumer Woes?

This article was published in the NY Times last year. A fascinating read.

Article Tools Sponsored By
By ROBERT H. FRANK
Published: January 18, 2007

When a lion achieves alpha male status, one of his first acts is to kill all unrelated cubs in the pride. Is that a bad thing?

As biologists have long realized, the question makes little sense. In the bitterly competitive environments in which lions evolved, the dominant male’s behavior was favored by natural selection because it brought females into heat more quickly, thus accelerating the transmission of his genes into the next generation. His behavior appears brutal to human onlookers and surely makes life less palatable for lions as a group. In the Darwinian framework, however, it is a simple fact of existence, neither good nor bad. In any event, such judgments have little practical significance, since moral outrage alone cannot prevent a dominant lion from killing cubs.

In contrast, when humans prey on weaker members of the community, others are quick to condemn them. More important, such denunciations often matter. Because complex networks of voluntary association underlie almost every human transaction, the bad opinion of others can threaten the survival of even the most powerful individuals and organizations.

But the supply of moral outrage is limited. To maximize its usefulness, it must be employed sparingly. The essential first step is to identify those who are responsible for bad outcomes. This is often harder than it appears. Failure at this stage steers anger toward people or groups whose behavior is, like the alpha lion’s, an unavoidable consequence of environmental forces. In such instances, moral outrage would be better directed at those who enact the rules under which ostensibly bad actors operate.

Full Story

Video: Consumer Affairs chimes in on Payday Loans

Consumer Affairs jumps into the world of video in a campaign against payday loans. Do you agree with the message?

Comparing Cash Advances in the U.S. versus United Kingdom

Have you ever wondered what are the differences of cash advance loans in other countries outside of the United States? It's true the payday lenders are regulated differently in other countries similar to the banking industry.

An Auburn University finding outlines numerous differences between the USA and our cousins across the pond.

In the US you must meet the following criteria to get a payday loan:
1. You must live within the United States.
2. You must have full time employment and have been with the same company for 6 months.
3. You must be at least 18 years of age
4. You are paid weekly.
5. You must earn at least $1000 US a month

In the UK you must meet the following criteria to get a payday loan:
1. You must live within the UK, Wales, Northern Ireland, or Scotland.
2. You must have full time employment
3. You must be at least 18 years of age
4. You income must be at least £300 each payday after all deductions and taxes.
5. Must have a bank account that is at least 6 months old

Of note, in the US, most payday lenders shy away from borrowers under 18 years old as at that age the risks usually outweigh the benefits. If you are 18, usually a family member would be a better source of emergency funds or if you are in college many universities offer emergency loans.