What could be more convenient than taking out a same-day payday loan when you need some quick cash? It’s deposited straight into your bank account. A week or two later, your next payday, the loan is repaid automatically because the lender had your bank details. Yes, there is a fee, but there’s no credit check, you don’t put up any collateral, the application was quick and easy, unlike a personal loan.
All you do is just go online, fill out some forms providing personal info about your steady job, and you have your $2,000 straight away. But did you ever consider how much is the true loan cost in this situation?
Is it a Good Deal?
As easy as it sounds it might not be as good a deal as you think. A payday loan is a short-term loan with an interest rate higher than 36%. That rate sounds high, doesn’t it? You see new car loans advertised for almost zero percent and home mortgages for about 5%. Banks provide personal loans for between 10% and 15%. Even a credit card cash advance charges a lower interest rate. A cash advance of $300 on the average credit card that you repay within the month would have a charge of about $14. That’s an APR of 57%.
Payday loan providers make their loans sound less expensive by not advertising their annual percentage rate (APR) in the same manner as a credit card or personal loan provider does. They say their interest rate will cost a fee per $100 loaned.
Let’s take an example.
- You apply for your loan online. You need $500 for your next pay, and that’s a week away.
- The fee for your loan is $15 per $100 borrowed. “That’s pretty good at 15%, isn’t it?” you think. So, you go ahead and agree to the loan terms and then give the lender a check for $575, forward dated seven days.
- The creditor will cash your check when the loan is due. If you have $575 in your account, then the transaction is completed.
- The cost of your loan was $75. That translates your annual percentage rate into 780%. High? Yes, but calculating your APR is complex and involves not just the loan amount and the fee, but the loan period and when you paid it back.
What Really Happens
The most significant problem customers have is that they cannot pay the loan back on time. When you think about it – if you don’t have $500 in your bank account this week, what’s the chances you will have $575 in that account the following week? That’s when customers “roll over” the loan. They can’t pay it back on the due date, so the lender charges the $75 fee and agrees to collect it next payday.
Are You the Average Payday Loan Customer?
According to available statistics, from a single lender each year the average payday loan customer takes eight to thirteen payday loans or loan renewals. So if you are the average customer, let’s say you roll over or renew your $500 loan ten times in one year. To borrow $500 for ten weeks, you will pay a total of $750 in finance charges plus repay the amount borrowed. Your $500 payday loan will end up costing you $1,250.
To get a payday loan you are required to give the creditor a personal check for repayment. If your check bounces, your bank will charge you a fee – often as high as $40.
Therefore, before taking out a payday loan, carefully consider the real cost – and ask yourself if it’s worth it.