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Understanding True APR: The Importance of Zharta’s Pay-per-Day System

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3 min read
May 19, 2023

When it comes to borrowing loans against digital assets, understanding APR and how it translates into the true cost can be confusing to beginners. Advanced users, on the other hand, have dealt with varying APRs and loan terms long enough that those two numbers will suffice to get a general idea of the deal they’re looking at.

Even advanced users, however, may not realize how the presence or absence of a Pay-per-Day system can muddle what ends up being the “True APR”.

In this post, we will explore how Zharta’s True APR sets us apart — both in terms of price and transparency — and why it should matter to borrowers.

Understanding the Misconception

Beginners often assume that calculating the interest on a loan is as simple as multiplying the APR by the borrowed amount.

As an example, let’s consider a 30-day, 1.4 ETH loan against a Doodles NFT with a 30% APR. These terms might lead some to believe the interest owed would be 0.3 x 1.4 = 0.126 ETH.

In reality, the interest accrued is significantly lower, at 0.036 ETH.

Daily Rates to the Rescue

To arrive at the true cost of borrowing, it helps to consider the daily rate, as APR stands for Annual Percentage Rate.

Let’s continue with the Doodles example.

By dividing the APR by 365 (days in a year), we arrive at a daily rate of approximately 0.08%. This translates to around 0.0012 ETH per day. Multiplying this daily rate by the 30-day loan term results in a total interest of 0.036 ETH.

Actual Rates

If the loan is repaid at the date of maturity exactly, the rate paid by the borrower — let’s call it Actual Rate — would be approximately 2.57%. This aligns with most lending protocols, including Zharta.

Where Zharta differentiates itself is in the impact of early repayments.

The Impact of Pay-per-Day

Zharta’s Pay-per-Day system allows borrowers to save significantly by repaying their loans before the full term. If, in our example, the borrower were to make their repayment after just 16 days, the interest accrued would be 16 x 0.0012 = 0.0192 ETH. The Actual Rate in this scenario would be around 1.37%.

True APR vs. Traditional APR

Let’s look at APR considering the days that actually elapsed until you repaid your loan.

From this point of view, Zharta’s implementation of Pay-per-Day ensures that the APR remains consistent and transparent.

If, as in our example, other competitors apply a 30-day cost to just 16 days of use, the APR becomes distorted.

Zharta’s True APR of 30% remains intact, while a competitor without Pay-per-Day might present an APR of approximately 59%, significantly higher than the expected 30%.

Zharta: The Best Choice for True APR

From this perspective, Zharta emerges as the ideal option to ensure the APR displayed aligns with the actual borrowing cost. Beyond the 7-day minimum interest, Zharta maintains a 100% consistent pricing model. In contrast, competitors without Pay-per-Day may require borrowers to perform complex calculations to determine the true cost of their loans accurately.

In Conclusion

Zharta’s Pay-per-Day system allows borrowers to know the true loan cost from the get-go. Truly, what you see is what you get.

This approach makes informed decisions that much easier — especially when paired with our Loan Simulator, which you can use right now to see the conditions available to you according to your assets (no wallet connection necessary!).

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