# How interest is calculated in payday text loans?

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Payday loans interest and penalties are regulated by FCA (financial Conduct Authority of UK). On 02/01/2015 they have notified rules for short term funding to protect customers from any over charge by the direct lenders. Some important point is:
1. Lenders will charge only simple interest and not compounding.
2. The cap for the daily interest rate will be 0.8% and lender can not charge above this rate.
3. The penalty for loan defaults can not be more than £15.
4. I no case interest and fees can not be more than principal amount.

Explanation of FCA rule:
1. Simple interest means, interest will be charge on principal amount only on day to day basis and no interest will be charge on interest itself. For example £0.8 interest will be charge for £100 loans per day so for 20 days term interest will be £.08×20=£16 and total amount payable after 20 days will be £116 only.
2. The maximum interest and fees is fixed as £0.80 per day for £100 this includes all expenses and commission paid by lender to brokers(in the case of the loan applied through the broker).
3. If the borrower fails to repay on time then penalty can not be more than £15 and interest will be continuing till the final re-payment, subject to maximum limit of amount borrowed.
4. Under any circumstances interest+penalty+collection charges can not be more than the amount borrowed.

What will be the payment schedule if repayment term is more than one month?
Here we explain by taking amount as £600 for 3 months.

Borrowed amountLoan termInterest amountRepayment afterAmount PaidBalance Amount
£6003 Month£144First month£48£696
Second Month£48£648
Third month£648£0

As per FCA regulations the APR (Annual Percentage Rate) is £0.80×365=292% per year.

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