How Expensive Are Payday Loans?

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How Expensive Are Payday Loans?

Want to sign up for a credit card with an annual percentage rate of 500%? You might laugh at the absurdity of that, but many people are doing the same basic thing with payday loans. The 500% is what the rate would be if you held the loan for a whole year.

Payday loans charge a fee, typically between 15% and 20% of the amount you are borrowing. This fee is expressed as interest. If you decide to roll the loan over once it is due, there will be another fee added (note: some loans are structured to roll over automatically). If you should miss a payment, there will be late-payment fees, which can be high.

There may be additional fees as well, such as administrative fees. These are spelled out in your contract. By law, they must be spelled out.

For example

If you took a $350 payday loan, that loan typically would include $60 in fees. If you can’t repay the $350 plus the $60 fee in the week or two when you next get paid, you would either need to pay another $60 fee to keep that loan outstanding or take out a different $350 payday loan with $60 in fees. That cycle can easily continue, with you paying $60 in fees every other week because you can’t pay the original $350 back.

If it took you 12 weeks to pay that amount back, and you were then able to stop from taking out another payday loan, that would be $360 in fees to borrow $350. You would pay more in fees than you actually borrowed. And this assumes that you were not late with your payments. If you were, that $360 might be much higher due to late fees. And if the loan went on longer because you couldn’t afford to pay it off, those fees would grow. If you kept rolling over the loan for 20 weeks, you would end up paying $600 in fees.

The chart below shows what a $350 payday loan could cost if held over for a whole year. The chart also shows what some alternatives could cost you over a year.

Note: Rates will vary among institutions and cards, and they will also vary based on your credit rating. The small bank loan in this example is unsecured, meaning that no collateral is needed for it.

And what if you didn’t have sufficient funds in your checking account when the lender cashed your check, and you were overdrawn? This happens a lot. You would be charged an overdraft fee, adding to your expenses.

According to a 2014 study by the Consumer Financial Protection Bureau, over 80% of payday loans were rolled over or followed by another loan within 14 days. These loans could thus prevent borrowers from using their money for other needs. In recent years, however, nearly all states have either capped the number of allowed rollovers to four or fewer or prohibited them entirely.