The Effective APR on a Salary Advance Is Not the Rate in the Advertisement
Summary
An advertised rate on a salary advance usually quotes interest alone, while the effective APR counts every charge against the money you actually received over the days you actually had it. A 0.1 percent per day advance that advertises as 36.5 percent a year can work out near 93 percent on a simple annualised basis, and higher still if the cost is compounded.
The rate in a salary advance advertisement is almost always interest alone. The effective APR is a different measurement: it counts every charge you bore, including the fee and the GST on it, against the money you actually received, over the number of days you actually had it. Those three corrections pull the number a long way. An advance quoted at 0.1 percent a day advertises as 36.5 percent a year, and can work out near 93 percent on a simple annualised basis once a fee is included.
What makes an APR effective rather than nominal?
A nominal rate is a headline: a per-day or per-month interest figure multiplied up. An effective APR answers the only question a borrower has, which is what the money cost per year of use. It has to get three inputs right.
- Every charge, not only interest. Processing fees, platform fees, GST on those fees and any mandatory add-on are part of the price of credit.
- The money you actually received. If a fee was deducted from the disbursal, the base is the net amount credited, not the sanctioned amount.
- The real term. A charge borne over thirty days is annualised by a factor of about twelve, and over twenty days by more than eighteen.
Get any of the three wrong and the answer flatters. Most advertised numbers get all three wrong at once.
How large is the gap, in a worked example?
An advance of Rs 20,000 for 20 days, interest quoted at 0.1 percent a day, a platform fee of Rs 500 and GST at 18 percent on that fee.
- Advertised annual rate: 0.1 x 365 = 36.5 percent a year.
- Interest actually charged: 20,000 x 0.1 percent x 20 days = Rs 400.
- Fee plus GST: 500 + 90 = Rs 590, deducted before disbursal.
- Credited to your account: 20,000 − 590 = Rs 19,410.
- Repaid at the end: 20,000 + 400 = Rs 20,400.
- Total cost: 20,400 − 19,410 = Rs 990 for twenty days.
Now annualise it honestly. Rs 990 on the Rs 19,410 you received is 5.10 percent for twenty days. There are 365 / 20 = 18.25 such periods in a year, so on a simple basis the cost is 5.10 x 18.25, or about 93.1 percent a year — roughly two and a half times the advertised 36.5 percent. If you treat the cost as compounding, because an unpaid advance in practice rolls into the next one, the figure is (1.0510 to the power of 18.25) − 1, which is about 148 percent a year.
Both are defensible ways to express the same Rs 990. Neither is 36.5 percent. You can reproduce the calculation on your own fee, tenor and interest figures in the (Salary Setu) Loan App Pointer app, an independent, unofficial calculator and guide rather than a lender.
Why does a short tenor make the APR explode?
Because a fixed charge does not shrink when the loan period shrinks, but the annualising multiplier grows. The same Rs 590 fee on the same Rs 20,000 is annualised by a factor of about 12 over thirty days, about 18 over twenty days, and about 36 over ten days. A borrower who clears a short advance quickly and congratulates themselves on saving interest has in fact paid the highest effective rate available, because the fee was spread over fewer days of use.
It is also why comparing a salary advance with a personal loan on the quoted rate alone is meaningless. On the figures above, a twelve-month personal loan at 18 percent and this twenty-day advance sit far further apart than their nominal rates suggest.
What should a lender be telling you?
Under the regulator framework for digital lending, a regulated lender is expected to give the borrower a Key Fact Statement setting out an all-inclusive annual percentage rate, covering fees and charges and not interest alone, with the total amount payable and the recovery mechanism. If the APR you are shown sits suspiciously close to the advertised interest rate, ask which charges were left out.
What must be disclosed, and in what form, has been revised more than once, so do not take a figure from any article as current. The circulars are published at the official Reserve Bank of India site, rbi.org.in, and your own Key Fact Statement and sanction letter are what bind the lender.
How can you check an APR yourself in two minutes?
- Write down the amount credited to your account, in rupees.
- Write down the total you will hand back, including every instalment, fee and charge.
- Subtract: that difference is the cost.
- Divide the cost by the amount credited to get the period rate.
- Multiply by 365 and divide by the loan length in days for a simple annual rate.
That is a floor rather than a precise APR, since it ignores the instalment pattern of a loan repaid in parts. For a single-repayment advance it is very close, and always closer than the advertised rate.
Frequently asked questions
Why do simple and compounded annualisation give such different numbers?
Because compounding assumes the cost is incurred again every twenty days on a growing base, which is what happens if an advance is renewed rather than cleared. Simple annualisation assumes it is borne once. Both are legitimate; a lender will quote the lower one, so ask which convention a stated APR uses.
Does the GST on a fee belong in the APR?
From your side it plainly does, because it leaves your pocket and you cannot avoid it. Some quoted figures exclude taxes, which is a common reason a disclosed APR looks lower than the cost you can work out yourself.
Can an app tell me the APR a lender will charge me?
No. An independent calculator works out an APR from figures you type in; it holds no lender rates and can make no offer. Never enter an Aadhaar or PAN number, a bank account number, a password or an OTP into any third-party app or website.
Treat the advertised rate as marketing and the two rupee figures as the facts: what reached your account, and what you hand back. Convert that pair into a rate per year before comparing anything. To run the conversion offline on your own numbers, the independent, unofficial app on Google Play does it with no account and no login. It is not a lender, not a broker, and there is no application form anywhere in it: it does not offer loans, cannot be used to apply for one, does not process applications, does not disburse funds, does not check application status and does not access any account. It is not affiliated with, endorsed by or operated by Salary Setu, Ampire Finance Pvt. Ltd., the Reserve Bank of India, the Government of India, or any lender. All figures are estimates for planning only.
