If you have a mortgage, credit card or personal loan, you will be familiar with the term APR. APR stands for annual percentage rate and as the name suggests, it is the rate of interest you will pay for a whole year.

What many are unaware of is that the APR quoted by a lender or mortgage provider also includes associated costs. Another common misconception is that the headline APR is what all applicants will receive if their application is approved. This is not the case.

The advertised APR is what the majority of people receive. However, that majority could be as slight as 51-49, so you need to do more than simply look at the number quoted. Where the APR causes the most confusion is with regards to loans by text.

Payday loans are routinely vilified in the media, with trade groups, consumer groups, politicians and the like lambasting them for being expensive and trapping people into debt spirals.

There are some strong arguments against these complaints, which are supported by data showing that millions of people use payday loans every year to help them through difficult times.

Critics immediately point to the APRs advertised by text loan providers, claiming that it is foolish to borrow money at rates of several thousands.

What these critics fail to point out is that text loans are not meant to be borrowed over a 12-month period. Payday loans are meant to help people deal with immediate, short-term financial difficulties.

If payday loans were designed to be long-term sources of finance, the providers would very quickly go out of business – why would anyone borrow at a rate of 4,000 per cent over five years when they can borrow at a rate of 17 per cent from a high street lender?

What you need to do as a potential borrower is to work out the interest over the period you intend to borrow for.

So, if you take out a £300 loan over a period of 30 days at an APR of 2,120 per cent, the total you would repay would be £387. That means you pay £87 in interest overall.

As you can see, this is a lot less terrifying than critics would have you believe. Herein lies the problem with APRs with regards to payday loans.

Yes, the APRs are high but the loans are short-term facilities, not long-term financing options, so the APR – while not irrelevant – does not paint a clear picture at all about how much a text loan will ultimately cost you.

Take one out over a year and the APR will take your debt to astronomical levels. However, if you use text loans correctly – which is infrequently and only over a month at the most – then they can make a lot of sense.

Most providers will have the cash in your account within a few hours and the lending criteria – while not easy – is a lot less stringent than those set by banks.

So you get speed and convenience at a cost of £87 in the example above, which most people would deem a fair price in today’s market. Those who get into difficulties with payday loans are the people who do not use them properly. It is when you do this that the APR becomes a real problem.

Use them as they were intended, however, and you could benefit like so many other people in the UK have over the last few years.