Payday loans are now the symbol of high-risk and predatory lending loans in America because of one reason: The typical cost of payday loans is 391%. It can go over 600 percent!
If you are unable to repay the loan – and the Consumer Financial Protection Bureau says that 80% of payday loans don’t get paid within two weeks then the interest rate increases while the total amount have to pay grows, making it nearly impossible to repay it.
It’s possible to think that an payday loan is the only option to pay an unexpected bill or even to pay off a debt, but the reality is that a payday loan can cost you more than the issue you’re trying solve. The cost will be higher than any late or bounced check charge the goal is to prevent.
Compare the payday loan interest rate of 391%-600% to the average interest rate for other options such as credit cards (15%-30 percent) as well as credit management plans (8%-10 percent) Personal loans (14%-35 percent) or online loan (10%-35 10% to 35 %). Are payday loans even be considered as a viable alternative?
Certain states have clamped down on the high interest rates in a way. Payday loans are prohibited in 12 states. 18 states have capped interest at 36% for the amount of a $300 loan. For loans of $500 45 states as well as Washington D.C. have caps however some are quite high. Median is 38.5 percent. Some states do not have any limits in any way. In Texas the interest rate can be up to 6622% on a $300 loan. What is that in actual figures? This means that if you return it within two weeks the amount will be $370. If it takes 5 months to pay back, it will cost $1,001.
In fact it’s five months, which is the typical amount of time needed to repay the $300 payday loan according to Pew Charitable Trusts.
Before you take out that fast, extremely expensive cash, you should know the details of payday loans entail.
Payday Loan Changes Retracted
The Consumer Financial Protection Bureau introduced an array of regulatory changes in 2017 that help safeguard borrowers. One of them was to require payday lenders – – what they call “small dollar lenders” -to assess whether the borrower is able to pay for an agreement with a 391% rate of interest rate, also known as”the Mandatory Underwriting Rule.
However, the Trump administration dismissed the claim that consumers should be protected, and the CPFB lifted the underwriting rule in 2020.
Other safeguards related to the method of paying loans back, include:
- A lender isn’t able to use the title of the car a borrower has as collateral to secure a loan in contrast to the title loan.
- A lender isn’t able to provide an offer to a customer who has an existing short-term loan.
- The lender is only permitted in extending loans only to those who have paid at minimum one-third of their principal amount due on each loan.
- The lender is required to inform the Principal Payoff Option to all borrowers.
- The lender isn’t able to repeatedly withdraw funds from the account of the borrower when the funds aren’t in there.
Congress as well as states are striving to improve protections, such as a plan to extend the interest cap of 36% across all states. In 2021, Illinois, Indiana, Minnesota, Tennessee and Virginia all tightened their grip on interest rates for payday loans.
How Do Payday Loans Work?
Payday loans offer a quick option for those facing financial difficulties and can be expensive for individuals and families.
Here’s how payday loans work:
The consumer fills in a registration form either at a cash advance office or on the internet. A recent identification document, a pay stub and a bank account number are all the documents required.
The loan amount varies from $50 to $1,000 according to the laws in the state you reside in. If your loan is approved, you get cash right away or the money is deposited into the bank account in a couple of days.
The entire payment must be paid at the time of the borrower’s next payday usually two weeks from now.
The borrower can either date personal checks in conjunction with their next pay check or let the lender immediately withdraw the funds from their account.
Payday lenders usually charge a rate of interest of $15 to $20 for each $100 loaned. Based on an annual percentage basis (APR) similar to that is utilized in credit cards or mortgages, auto loan etc. This APR is ranging between 391% and more than 521 percentage in the case of payday loans.
What Happens If You Can’t Repay Payday Loans?
If a borrower is unable to pay back the loan in time for the two-week deadline, they could request the lender to “roll over” the loan. If the state of the borrower permits it, the borrower only pays any fees due and the loan is then extended. However, the interest rate increases and finance charges also increase.
As an example, the median payday loan amount is $375. With the lowest financing charge offered ($15 for every $100 borrowed) the borrower owes an interest charge of $56.25 for an overall loan amount of $431.25.
If they choose the option to “roll over” the payday loan the new loan amount will be $495.94. This is the total amount they borrowed $431.25 plus a finance charge in the amount of $64.69 equals $495.94.
This is how a $375 loan can be turned into nearly $500 within a month.
How Payday Loan Finance Charges Are Calculated
The typical cash advance in the year 2021 stood at $375. The median interest, (or “finance charge” as payday lenders refer to it for a loan of $375 will be in the range of $56.25 to $75 based on the conditions.
The interest/finance cost is typically between 15 to 20%, based on lender however it may be greater. The laws of the state govern the maximum amount of interest a payday lender can charge.
In the interest rate, to be paid can be calculated simply by multiplying the borrowed amount by the interest rate.
From a mathematical point of view the maths would be as follows in the case of a 15 percent loan from a mathematical perspective: The sum of 375 times .15 is 56.25. If you agreed to conditions of $20 per $100 borrowed (20 percent) It would look like this: 325 x .20 is 75.
It means you’ll have to pay $56.25 to get $375. This is a interest rate of 391 percent APR. If you pay $20 for $100 borrowed, you will pay an interest charge of $75, and an interest rate that is 521 percent APR.
How Payday Loan Interest Rates Are Calculated
The annual percentage rate (APR) used for payday loans is calculated by dividing the amount of interest paid by the amount that is borrowed and multiplying it by 365, then dividing it by duration of the repayment period; and then multiply that number by 100.
In mathematical terms, APR calculation for a loan of $375 can be described as:
56.25 / 375 = .15 x 365 = 54.75 / 14 = 3.91 x 100 = 391%.
For the amount of $20 for every $100 loaned (or 20 percent) for a $375 loan that is, it will look like this 75/375 = .2 * 7365 = 73/14 = 5.21 100 x 521 = percent.
Additionally it is true that the APR is significantly higher than other loans offered. If you took out an credit card instead and even at the most expensive credit card rate it will cost you less than one-tenth of interest that you pay for payday loans.