Payday loans are short-term, small-dollar loans you get after signing a check or giving permission to electronically withdraw funds from your account. You must pay the money back after your payday, usually two weeks or a month later. Payday loans in stores require you to return to the store to pay back the loan, and the store will then run a check and make an electronic withdrawal for the total loan amount, plus interest. Payday loans issued online use electronic withdrawal, so you do not have to return to the store.
Average interest rate on payday loans is 391%
It’s not uncommon for consumers to face a hefty interest rate when taking out a payday loan. A Pew Charitable Trusts study found that the average borrower is trapped in 10 loans within a year if he doesn’t pay it back. A third of borrowers will go into default, which stays on their credit report for seven years. Payday lenders prey on people in desperate need of short-term economic relief.
The average interest rate on payday loans is 391%, according to economists at the St. Louis Fed. Many consumers aren’t aware of the high interest rate and focus instead on the fees and other costs. However, focusing on the fees and interest rate prevents consumers from shopping around for lower rates. In fact, comparing APRs is important because you could end up paying nearly 20 percent less than you’d pay on a credit card.
When comparing payday loan interest rates with credit card rates, borrowers should keep in mind that payday loan fees are typically high. A typical two-week loan has a service charge of $15 per $100 borrowed. While credit card interest rates range from 12 percent to 30 percent, payday loan fees are more than triple that. As a result, payday loans can be extremely costly to pay off. Luckily, many states have laws in place to regulate these loans.
Alternatives to payday loans
You may be wondering if you have any other options aside from payday loans. Payday loans are convenient, but they are expensive. Unless you have excellent credit, you should avoid these loans if you can. There are several alternatives that might be more convenient and cost less money. The best place to start looking for alternatives is by checking out your credit score on Experian. If you have good credit, you can even get your credit report for free! You can narrow down the choices and get approved.
Credit unions are one option for borrowers. Credit unions are nonprofit member-owned financial cooperatives that offer the same services as retail banks. Some credit unions offer a good payday alternative loan through the PAL program. To qualify, you must be a member of the credit union for at least a month. This PAL allows you to borrow from $200 to $1,000 for a short period of time, usually up to six months. The interest rate for a PAL is typically not higher than 28 percent.
Although payday loans have high interest rates, these loans may be an excellent alternative if you’re having difficulty making your monthly payments. In some cases, alternative loans offer longer repayment terms or allow you to make smaller payments. These loans may also be better suited for people with poor credit. They will usually have lower fees and interest rates than payday loans. If you’re in need of a larger amount, you might consider borrowing from a friend or family member or peer-to-peer lending platform.
Another option for paying off payday loans is getting a cash advance from a credit union. Depending on the amount you need, credit unions can extend you up to $2,000 and charge you as little as 28 percent interest. You can repay the loan over a longer period of time with a credit union, but remember that you still need to repay the money! You can also borrow against your 401k, but you might have to pay an early withdrawal fee and withdrawal fees.
The Center for Responsible Lending analyzed the average APR for a $300 loan over a 14-day term in each state. The Center found that borrowers often pay more in interest than they actually borrowed. Payday lenders add “finance charges” to their loans, including interest, origination fees, and insurance. In some states, such as Arkansas, repayment terms for payday loans are not disclosed to consumers. Fortunately, Arkansas has an interest cap of 36%.
However, these terms are not ideal, as they can increase the total cost of borrowing by astronomical amounts in a short time. Many cash-strapped borrowers simply return to their lenders to get another extension. Lenders love these borrowers, so they offer a rollover option. With a rollover, the borrower has an additional two weeks to repay the loan, but must pay additional fees. Depending on the lender, repayment extensions can add up quickly, making them less than ideal for many borrowers.
The repayment terms for payday loans vary from lender to lender. The loan agreement must include certain information. Generally, borrowers will have 55 days to pay the loan in full, unless they are paying it in full on the same day. Interest on payday loans can run up to 400 percent a year. In addition to the interest rate, payday loans are expensive. You’ll want to consider all the factors before signing any loan agreement.
Cost of payday loans
While there are several factors that contribute to the high cost of payday loans, the primary driver is repeated borrowing. Consumers rollover payday loans or re-borrow within a short period of time after repaying the first loan. This study takes into account loans taken out within 14 days of paying off the first loan, and counts them as renewals and part of the same “loan sequence.”
The fees charged by payday lenders typically range from $10 to $30 per $100 borrowed. While state laws vary, they are typically around $15 per hundred dollars borrowed. That works out to an annual percentage rate of nearly 400% for a two-week loan. This means that a $300 loan taken out before payday would end up costing $345 to repay. In addition to fees, many customers don’t qualify for traditional personal loans and often end up maxing out their credit cards.
Payday lenders can be an extremely costly solution to a temporary financial crisis. These lenders usually require post-dated checks or authorization to debit your account for each outstanding balance. If you miss a single payment, the interest charged could easily reach 300 percent. And that’s before you factor in any fees or finance charges. In the long run, the costs of payday loans can add up to be unmanageable. In addition, they can result in a vicious cycle of debt, which is not healthy for anyone.
Despite high interest rates, the fees and charges for payday loans often remain hidden. The Consumer Financial Protection Bureau is considering new rules that could regulate the practice. They want to keep rates under control so that consumers can easily compare the fees associated with payday loans. In the meantime, these loans remain a popular solution for those facing an emergency, but they come with a price tag. It’s worth pointing out that payday lenders are notorious for their obscenely high interest rates.
Another factor contributing to the cost of payday loans is the annual percentage rate. The average customer earns over $30k per year, but the average payday loan borrower makes at least $30,000 a year. As a result, payday loans can be expensive if you’re not careful. Payday lenders require their customers to sign an agreement that authorizes them to take money from their bank account or debit card, despite the fact that the loan is only needed for a short-term need.