How Much Do Typical Payday Loan Interest Rates Cost?
When it comes to the cost of payday loans, there is a wide range of options available due to the fact that some states limit the interest rates that payday loan providers can charge. There are some that come with interest rates as high as 500%, which is significantly higher than the 9.5% that banks charge for personal loans or the 20-30% that credit card firms charge APR for loans.
How to Calculate Your Payday Loan’s Interest Rates
Under the Federal Truth-in-Lending Act, payday loan lenders are required to inform potential borrowers of all fees and interest rates associated with the loan before the borrower gives their consent to accept the loan. A disclosure statement that provides details on the annual percentage rate (APR), loan term, and total cost of the loan must be provided to you by the lending institution.
The problem is that lenders of payday loans almost always display the finance charge in the form of a specific cash amount rather than a percentage of the total loan amount. The good news is that you can use that amount to calculate the actual interest rate that you are being charged.
Let’s say you borrow $400 and are charged a fee of $65 for the privilege. You also have two weeks to repay the whole amount.
- Take the total amount of the loan and deduct the fee. In our situation, this equates to 65 divided by 400, which results in the number 1625.
- It is necessary to multiply the solution to the previous equation by 365, which is the total number of days in a year. When multiplied by 365, the number 1625 equals 59.31.
- Deduct from the previous result the number of days that are still available on your loan agreement. Consequently, 59.31 multiplied by 14 is equal to 4.236.
- In order to transform it into a percentage, the decimal point needs to be shifted to the right by two spaces. The annual percentage rate of interest for our made-up loan comes to a total of 423.6 percent.
How high-interest rates on payday loans can cause problems
When you submit an application for the vast majority of loans, such as a mortgage, personal loan, or auto loan, the lender will look at a number of different aspects. They will run a credit check to see how responsible you have been in the past with borrowing money. In addition to your income, they will take into consideration how much overall debt you have.
A reliable lender would want to make sure that you can afford to pay back the loan before agreeing to work with you. If you earn $1,000 every two weeks and have to make $1,000 in debt payments every month, it will be tough for you to repay $500 in just two weeks. If you cannot demonstrate that you will be able to repay the loan, many financial institutions will either reject your application or recommend that you borrow a lower amount.
But not payday loan firms. Because they aren’t forced to verify your capacity to repay the loan, they are more likely to lend you $500 even if your monthly take-home income totals $2,000 and your other debt payments total $1,000. This is because they aren’t required to verify your ability to repay the loan.
The interest rate and fees associated with payday loans continue to accrue even when borrowers are unable to repay the principal amount borrowed. The vast majority of loan providers provide consumers the opportunity to have their existing loans extended. This action usually results in the payment of a fee, such as $15 for each $100 that was borrowed.
This fee has no impact whatsoever on the amount of the principal borrowed. It is only an additional price that will be added to the one you already owe at this time.
If you borrow $300, pay a fee of $45, and then elect to extend the loan, you will have an extra cost of $45 added to the principal balance of the loan. The first $300, in addition to the initial cost of $45, will still be required to be paid.
If you need to renew the loan, there will be a fee of $45 added to the total amount due. The process may carry on indefinitely, but doing so would incur increased costs.
If you want to avoid getting into a situation where you can’t get out of debt, the greatest thing you can do is look for ways to borrow money that are less expensive.
