Payday Loan Interest Rates

Payday loan interest rates are some of the highest in the lending market, as most borrowers know. But often, there is more to the costs of a payday loan than just the interest rate. We’ll profile the many different costs that go into a payday loan:

Annual Percentage Rate
Also reported as the APR, the annual percentage rate is the amount you spend in interest alone. If, for example, a payday loan were written with a 20% interest rate, then it would be said that the loan had an APR of 20% per year. Ordinarily, the APR on a payday loan isn’t much higher than a credit card, since state and local governments can and do write laws to establish a maximum annual rate. The maximum annual percentage rate is known as the “usury rate.” All states have established usury rates save only for Nevada.

Finance Charges
One of the most common fees in payday lending is what is known as a “finance charge,” or an amount charged to a borrower regardless of the interest rate or account balance. A finance charge is usually a flat, fixed amount, of…say, $20-50, and can be charged monthly. Thus, if you were to borrow $200 for one month with a payday loan, you would have to pay the interest (APR/12) for that month, plus the finance charge, which may range from $20-50. On the low-end, a $20 finance charge is the equivalent to 10% in monthly interest on a $200 loan, or 20% a month on a $100 loan.

Effective Annual Rate
Most advisors will tell payday loan borrowers that they should ignore entirely the annual percentage rate and focus on the effective annual rate. The EAR is calculated by combining the APR costs plus finances charges to determine an amount, in percentage points, that you would pay for holding the loan for a full year. If, for example, a payday lender charged an APR of 20%, and finance charges of $20 per month, you would pay $280 on a $200 loan per year, using simple interest calculations. That’s an effective interest rate of 140% per year, even though the APR is only 20% annually. This is why you should always evaluate a loan on an EAR, not APR, basis.

Saving Time, Money and Fees
Before taking out a payday loan, always consider methods for lowering your costs, and avoiding a payday loan, if possible. Could you do one of the following?

1. Comparison shop for a payday loan? If nothing else, you’ll get a lower rate loan!

2. Negotiate with your other lenders or bills due. If you’re looking to get a payday loan to pay off another creditor, or to pay a soon-to-be due bill, it might be a good idea to give them a call, tell them you’re having a hard time with payments, and see if you can restructure the debt. Most banks and companies have a department that works entirely with customers who aren’t able to keep up with their bills. They can and will work with you!

3. Look at other lending options. Credit cards are good, and less expensive than a payday loan. A friend or family member may be able to help you out with a loan. Or, of course, you might be able to scrape up some cash by selling a few things you don’t need any more!

As you can see, it isn’t just about the interest rates itself, but the fees, charges and other add-ons that can quickly add up to more than just the now seemingly inexpensive annual interest. Always consider every cost before signing onto a loan, and seek out every opportunity from inexpensive to expensive before signing your name to a dotted line.

Related Information