Payday lenders usually charge interest of $15-$20 for every $100 borrowed. Calculated on an annual percentage rate basis (e as is used for credit cards, mortgages, auto loans, etc. – that APR ranges from 391% to more than 521% for payday loans.
If a consumer can’t repay the loan by the two-week deadline, they can ask the lender to “roll over” the loan. If the borrower’s state allows it, the borrower just pays whatever fees are due, and the loan is extended. But the interest grows, as do finance charges.
For example, the average payday loan is $375. Using the lowest finance charge available ($15 per $100 borrowed), the customer owes a finance charge of $ for a total loan amount of $.
If they chose to “roll over” the payday loan, the new amount would be $. That is the amount borrowed $, plus finance charge of $ = $.
How Payday Loan Finance Charges Are Calculated
The average payday loan in 2021 was $375. The average interest – or “finance charge” as payday lenders refer to it – for a $375 loan would be between $ and $75, depending on the terms.
That interest/finance charge typically is somewhere between 15% and 20%, depending on the lender, but could be higher. State laws regulate the maximum interest a payday lender may charge.
From a mathematical standpoint, it looks like this for a 15% loan: 375 x .15 = . If you accepted terms of $20 per $100 borrowed (20%), it would look like this: 375 x .20 = 75.
That means you must pay $ to borrow $375. That is an interest rate of 391% APR. If you pay $20 per $100 borrowed, you pay a finance charge of $75 and an interest rate of 521% APR.
How Payday Loan Interest Rates Are Calculated
The annual percentage interest rate (ount of interest paid by the amount borrowed; multiplying that by 365; divide that number by the length of repayment term; and multiply by 100.
For the $20 per $100 borrowed (or 20%) on a $375 loan, it looks like this: 75 ? 375 = .2 x 365 = 73 ? 14 = 5.21 x 100 = 521%.
Again, the APR is astronomically higher than any other lending offered. If you used a credit card instead, even at the highest credit card rate available, you are paying less than one-tenth the amount of interest that you would on a payday loan.
Payday Loan Alternatives
Surveys suggest that 12 million American consumers get payday loans every year, despite the ample evidence that they send most borrowers into deeper debt.
There are other ways to find debt relief without resorting to payday loans. Community agencies, churches and private charities are the easiest places to try.
Paycheck advance: Many companies offer employees a chance to get money they earned before their paycheck is due. For example, if an employee has worked seven days and the next scheduled paycheck isn’t due for another five days, the company can pay the employee for the seven days. It is not a loan. It will be deducted when the next payday arrives.
Borrow from family or friends: Borrowing money from friends or family is a fast and often the least expensive way to dig yourself out of trouble. You would expect to pay much lower interest rate and have far more generous timeframe than two weeks to pay off a loan, but make sure this is a business deal that makes both sides happy. Draw up an agreement that makes the terms of the loan clear. And stick to it.