What Are The Interest Typical Rates For A Payday Loan?
Every payday loan is unique – no terms and conditions are the same. Know how they work and how to calculate fees and interest with AdvanceSOS.
Payday loans are transparent. You know upfront how much you will pay at the end of your term agreement and why you are paying for such fees. You can see what is ahead and plan for it. Know how you plan to pay for your loan and where to get the money you need for repayment.
Continue reading to know what exactly you are getting into with payday loans. Never again be a victim of undisclosed rules and hidden charges.
How Payday Loans Work
- Consist of small sums of money only
- Due on the day following the borrower’s next paycheck or government check
- Payday lending is quick. You can get money as fast as 24-48 hours. It is also easy to get as there is no documentation like hard credit checks and collateral.
The nature of payday loans is that it is easy and fast. They are ideal for cash emergencies that only need a cash advance until the next paycheck.
“I can pay for this problem in two weeks. But, if I do not pay it now, the consequences will be dire.” – these are the types of situations that payday loans help with. Borrowers who need immediate advance access to money are served right by payday lending.
Why Do Payday Loan Interests Get So High?
Payday loans are paycheck cash advances. The service makes money available now instead of later. This service is one of a kind to payday lending and is hard to find anywhere else. It is a high-risk business; lenders have little assurance of repayment.
There is no collateral or guarantor for most payday loans. The lender has no one else to hold accountable for the repayment of the loan aside from the borrower. Lenders are vulnerable when borrowers fail to repay as promised.
Payday lending lacks the sturdy backbone that other loans have. For payday loans to work, lenders need to charge higher interest rates to justify the high-risk loans they offer.
Fast Cash and Repeat Borrowing
Payday loans are named such for a reason. They are due on the next payday. It is only helpful when it stays true to this definition. It helps in times of immediate need when the lack of access to money can result in dire consequences.
Not sticking to the original purpose of payday loans is what leads people to harm. Payday loans are short-term loans and should be paid as such – within a short time. The dangers of payday loans are brought by not understanding or choosing to neglect this vital information.
Repeat borrowing and indefinitely extending your loan is a breach of lender-borrower trust. Your lender helped when you needed it, even if the risks were very high. You received money effortlessly, with no collateral nor a guarantor. But when the payment you promised to pay was due, you failed to repay your loan.
It makes sense for lenders to charge higher fees because the loan is now even riskier. There is no denying that payday loans charge higher rates than other loans. But again, this is because it shoulders the greatest risk of all loan types.
The Interest Rates in Different States
Reference: Center for Responsible Lending
Calculating Payday Loan Fees and Interest
The typical rates for payday loans range from 15%-20% per 14 days. Payday lenders usually charge interest of $15-$20 for every $100 borrowed.
- To calculate the loan fee given the interest rate:
amount borrowed / 100 * interest rate
Note: the loan fee will be payable on top of the original amount borrowed.
- To calculate the interest rate given the loan fee:
loan fee/ borrowed amount
Example of a payday loan
Using the second equation above, the interest rate of $15 for every $100 borrowed is:
Meanwhile, the interest rate of $20 for every $100 borrowed is:
The average payday loan in 2020 was $375. The loan fee for borrowing $375 is between $56.25 and $75, depending on the terms you choose to accept.
- If you choose 15%: $375 x 0.15 = $56.25.
- If you choose 20%: $375 x 0.2 = $75.00
Payday Loan Regulations
Payday loans, like every other loan on the planet, are subject to government laws and regulations. Regulations aim to promote the well-being of consumers. But not all consumers agree about payday loans.
To some, payday loans are helpful, and sometimes, downright life-saving. But some see payday loans as harmful and taking advantage of the poor and desperate. Throughout the US, there is a division in state regulations on payday loans. As of March 2021,
- Twenty-five (25) states allow payday lending with no regulation (ex.: Missouri & Nevada)
- Seven (7) states permit it with regulations.
- Seventeen (17) states and the District of Columbia prohibit it.
State regulations surrounding payday loans themselves in every state differ. Specific details and provisions of individual state laws are available online.
The Federal Reserve System established the independent Consumer Financial Protection Bureau (CFPB). It offers blanket protection to consumers across states. The CFPB tracks payday lending practices and communicates with consumers. The bureau uses this information to help develop federal regulations.
As far as financial services go, payday lending caters to the underserved populace. Payday loans offer top-notch accessibility to money to anyone who needs them 24/7, with no hassle. Whether this is worth its price-tag is a difficult call to make.
Taking out a payday loan is a choice available when all else fails. It is easy and fast, for sure – this may mean the world to someone who may lose a job without the car repair or someone who may lose a child if a medical bill remains unpaid.
So, choose wisely. Know what matters to you the most and choose as you see fit. Payday loans always have your back, no matter what. It ensures that there is always an option and that you are not alone.
Amanda is a senior financial copywriter at AdvanceSOS. Amanda has been writing about finance since 2015. She graduated with a Master’s in finance from the University of Oklahoma. As a result, she has a wealth of experience and knowledge to share with her readers.