APR Formula: [Note: Click LINK below to download a PDF of this Formula.]
100 X 365/D X (C/L -1) =APR
Where: D = number of days of loan
C = total cost of loan
L = amount of loan
Typical Payday Loan example:
Client borrows $100 for 2 weeks (14 days) with a fee of $17.
100 X 365/14 X (117/100 – 1) = APR
2607.14 X .17 = 443.21 % APR Total cost to client = $117.00
Another scenario. Client borrows $100 for 2 weeks (14 days) with a fee of $75.
100 X 365/14 X (175/100 – 1) = APR
2607.14 X .75 = 1,955.35 % APR Total cost to client = $175.00
Typical Bank Overdraft example (NSF’s amount to short term, single payment payday loans:
If a bank customer overdrafts their account by $100 they can be charged a $35+ Overdraft [NSF] fee for the first day. An Extended Overdrawn fee of $35 on the sixth day.
100 X 365/6 X (170/100 – 1) = APR
6083.33 X .70 = 4,258.33 % APR Total cost to client = $175.00
If that same overdraft is for only $10 (some bank’s minimum):
100 X 365/6 X (80/10 – 1) = APR
6083.33 X 7.0 = 42,583.31 % APR
Total cost to client = $80.00
According to PEW, when the state of Georgia outlawed payday loans the banks netted 1.4 billion dollars more in overdraft fees the next year.
Typical Late Fee example:
Using a common Water District bill as an example. If a financially strapped consumer is one day late paying their water bill of $17.59 a $5 fee is charged.
100 X 365/1 X (22.59/17.59 – 1) = APR
36500 X .28 = 10,220.00 % APR
Total cost to client = $22.59
So… Why do banks and credit unions “HATE” payday loan and installment loan lenders? Because payday loans are cheper for the consumer in a short-term financial pinch AND the majority of bank and credit union profits are derived from the NSF fees thaey charge their customers!
“In all, the CFPB found that 60 banks derived a significantly higher portion of their overall recurring earnings from consumer overdraft and NSF fees than their peer institutions.”
“Additionally, the fees represented 65.3% of all reported consumer deposit account fee revenues.”
What’s the answer to all this controversy for an entrepreneur? Grab a copy of our “Payday Loan/Installment Loan Manual” [updated 2X per year] and learn how to make money by lending money!
You don’t really want to open a pizza parlor, a florist shop, another taco stand… do you? In the small dollar lending space, your inventory is MONEY! Money does not rot, die, or get thrown in the garbage at the end of the day.
Link to download a PDF of this calculator.