01 July 2014
What Is Loan Percentage Rate-LPR versus APR
There have been many reports and news over the past few weeks about Congress capping payday loans. However, there have been a lot of number flying around with these reports, but many of the numbers are just plain wrong, or inaccurate to say the least. The reason is that many of the critics for payday loans like to use the term APR, or annual percentage rate. This is the formula for calculating long term loans, and what a person pays annually on them given their length of payments. However, the critics try to use this same number for short term loans, but there is only one payment. How can a person really use the same calculation for a loan that has only 1 payment versus one that has 12, 24, or even 48 payments. There is no way to accurately use the same calculation, yet these critics try to use this fake number as their sole basis for all of their regulations and claims that the short term loan industry needs to be capped or shut down.
The problem here is lack of understanding, or even the lack of a proper measurement. It would make sense to use a different set of numbers for short term loans so that people are not being mislead by them, or that people who are against them are not unfairly using numbers that don't accurately reflect the true amount. One way, to do this is with a L.PR. or loan percentage rate. This would be the rate charge for the loan, and not based on annual payments, which these loans do not have. A typical payday loan has only 1 payment, and the interest is capped in most states at 15%, or $15 for every $100 borrowed. This means that the LPR for these loans is actually 15%, which is quite reasonable and way below the federal cap of 36%.
Critics try to use the APR numbers because it helps their cause, but it's not accurate. The only way the APR would be true is if the person didn't pay back their loan on time, and continued to refinance the same loan over and over again for 26 times, or the course of the entire year, which most loan borrowers do not do. However, any loan if not paid back on time and continually refinanced over and over again is not a good things and most likely get a person into trouble. Case in point is the housing industry and all the loans they were making over the years. People kept refinancing their loans and not paying them back, and look where that got us. Any loan, if not paid back, and refinanced over and over again is a bad thing and would result in a high interest, so the fact that critics are targeting payday loans like this is the standard for all loans is completely misleading, unfair, and inaccurate. Instead of trying to talk about fake numbers and various 'what if' scenarios, people need to start talking about the real numbers and start using the term LPR or loan percentage rate, which is the rate of interest charged during the course of the loan or life of the loan, and not APR or annual percentage rate, which is a loan over the course of an entire year.