The cost of a payday loan would vary by state in the US, but they typically come with an APR of around 300%-600%. The APR can depend on state regulations, the loan amount and length borrowed for, and in some cases, your credit score.
Let’s dive in to know more about payday loans and see what these loans cost.
What is a Payday Loan?
A payday loan is a type of short-term financing with two to four weeks of maturity. It is a type of unsecured shot-term loan.
A payday loan is often called an emergency loan as well. It is offered by private lenders mostly and to borrowers with emergency cash needs.
Payday loans are granted for small amounts, often from $50 to $1,500. Lenders may provide a larger loan depending on the borrower’s credit profile though.
Paayday loans come with one of the highest interest rates, with the APR ranging anywhere from 300% to 600% for various reasons.
Payday loans have the highest approval chances for borrowers with bad credit or no credit history. These products are used mostly by those in need of cash, who don’t have access to traditional bank loans, credit cards and personal loans with better interest rates.
How Much Does a Payday Loan Cost?
Payday loans are expensive and the annual percentage rate (APR) of these loans is often a three-digit figure.
Some states in the US have regulated payday loans and capped the APRs. However, in most states, these loans are still charged by lenders at the highest interest rates.
Source: Center of Responsible Lending
The average APR of payday loans is staggering in the states where it is uncapped by regulators. For example, it is 664% in Texas and 652% in Utah.
The interest rate of these loans is described in terms of the annual percentage rate. So, the APR of these loans is for one year.
However, these loans are short-term and are offered only for two to four weeks commonly. Still, the interest cost of these loans will be high.
Let’s calculate the payday loan cost of $500 using the average APR of Texas from the above infographic.
| Loan Term | Interest at 664% APR | Total Repaid |
|---|---|---|
| 2 Weeks | $ 127.69 | $ 627.69 |
| 1 Month | $ 255.38 | $755.38 |
| 6 Weeks | $383.07 | $883.07 |
| 2 Months | $510.02 | $1,010.02 |
| 3 Months | $766.15 | $1,266.15 |
The APR of 664% equates 55.33% monthly interest rate. However, the actual rate charged by the lender will depend largely on the borrowed amount and the loan term.
The total cost of the payday loan may also include a fixed fee from the lender. This fee is similar to the loan originating fee of a commercial loan.
So, the total cost of repaying a payday loan might further increase depending on the fixed fee charged by your lender.
In comparison, let’s look at the cost of a $500 payday loan using the maximum APR of Oregon:
| Loan Term | Interest at 154% APR | Total Repaid |
|---|---|---|
| 2 Weeks | $ 29.53 | $ 529.53 |
| 1 Month | $ 64.17 | $564.17 |
| 6 Weeks | $88.60 | $588.60 |
| 2 Months | $98.18 | $598.18 |
| 3 Months | $133.48 | $633.48 |
This shows the huge difference the annual percentage rate makes, even in very short terms. Although APR of 154% might sound like a lot compared to the interes rates advertised on credit cards and secured loans, in effect, you would pay less than $30 in interest on a $500 payday loan paid back in 2 weeks.
Important Points to Remember about Payday Loans
If you are looking for a payday loan, here are a few key points to remember.
- State rules on these loans vary. Some states have capped the APRs for emergency or fast cash loans and others haven’t yet.
- The regulatory environment in your state would change the total cost of borrowing significantly.
- Your lender may charge separately for late fees, returned check fees, or insufficient fund fees. Read your agreement carefully before taking out a loan!
- If your loan repayment does not clear with the lender it may go to a private collection agency. It can harm your credit score.
You may need to roll over your current loan if you fail to repay on time. A research report suggests that 1 in 4 payday loans are extended or rolled over.
Why is the Payday Loan APR so High?
Several factors contribute to the APR of any loan. Payday loans are specifically costly and can result in more interest payments than the principal amount of the loan.
Here are a few key reasons that make these loans so expensive.
Payday Loans are Unsecured
These loans are unsecured in nature. Loans without collateral are more expensive compared to secured personal loans. An unsecured loan means that borrowers are not required to pledge any assets when they take out the loan. This means, that the lender cannot claim any of your valuables (such as your car or house) in case you don’t pay back the loan. This means more risk for the lender, sso they charge higher fees.
Payday Loans are Accessible
Because payday loans are offered to people who don’t have access to commercial loans, such as those with bad credit and no credit history, the risks re higher. In fact, payday loans hve a high default rate, meaning that between 15-25% of borrowers will not make repayments on the loans they have taken out. This means that the lenders calculate with having to make the lost money back in interest payments from those who do pay back their loans.
Payday Loans are Short term
As discussed above, payday loans are designed to be paid back in 2 weeks up to 2-3 months, and as such, the “annual” rate of interest is never annual. Lenders need to make their money quick, due to the short term nature of payday loans. If they lend you $1,000 for a month, they need to charge you a high interest rate to make their trouble and risk worthwhile.
Lack of Regulatory Restrictions
As mentioned above, payday loans are still unrestricted in terms of ARPs in many states. Thus, lenders could charge high APRs. Also, there is a legal loophole for Native American-owned payday lending businesses, through which online payday lenders can offer high interest loans nationwide, regardless of state regulations. You can read more about that in our article: Why are Native Americans involved in payday loans?
Pros and Cons of Using a Payday Loan
Payday loans are not for everyone. These loans come with certain pros and cons for the borrowers.
Pros Explained:
- These loans are available easily.
- The processing and approval time is short.
- You do not require a collateral or a guarantee.
- You do not need a certain credit score to qualify.
- The repayment is a lump sum amount at the end of the loan.
Cons Explained:
- These loans come with high interest costs for the borrowers.
- Ease of access may lead you to the debt trap with constant rollovers.
- You may lose credit score points if you fail to repay on time.
