Are you strapped for cash and looking at your options? A payday loan might seem like a quick and easy fix to your financial problems. Yet, if you’re not aware of how is the interest on a payday loan calculated, you can be caught in the payday tornado.
That’s what can happen if you don’t pay back your loan on time and you have to keep taking out loans to pay off your first loan.
Keep reading to learn how interest on a Payday loan is calculated.
Are Payday Loans Legit?
There’s a lot of controversy around payday loans. They’ve been called predatory loans, risky loans, and something to stay away from. They are very different from other types of loans such as personal loans or installment loans.
About 12 million people turn to payday loans when faced with a temporary financial crisis. They are legitimate means to borrow money, but they’re meant to be paid back in 14-31 days or whenever you get your next paycheck.
If you don’t do that, then you’re hit with high-interest rates that will keep you from paying that loan back completely.
How is the Interest on a Payday Loan Calculated?
This is how payday loans really work. You have to pay back the amount borrowed, the fees and the interest rate.
You can take out $500 in loans thinking that you have to pay back $500 plus a little bit more in fees. Nope, that’s not how they work.
When you take out a payday loan, read the fine print. You’ll see a couple of sets of numbers. The first is the fee for the loan. This can be anywhere from $10 – $25 per $100 borrowed.
If you take out a loan for $500, your fee can be $50 – $125. That doesn’t seem too bad until you factor in the APR.
The APR is the annual percentage rate. On credit cards and personal loans, this can be anywhere from 5% to 29.99%, depending on your credit and the type of loan you get.
With payday loans, the APR tends to be about 400% though many lenders charge more. That means that over the course of the year, that $500 loan can cost $2000 in interest.
Payday loans are meant to be paid back in two weeks, but they typically aren’t. Borrowers will take out another payday loan with more fees to pay back the original loan.
Let’s figure out how much that payday loan will really cost you. This formula is from ConsumerFed.org.
Your loan is $500. The interest fees are $15 per $100 borrowed amount for a total of $75. You repay the loan in 14 days.
To figure out the APR, take the interest fee and divide by the borrowed amount:
75/500 = .15
You’re paying 15% in fees. Now, multiply by the number of days in a year (365).
.15 * 365 = 54.75
Divide that number by how many days you have to repay the loan.
54.75/14 = 3.9107
Now, to discover how is the interest on a payday loan calculated, multiply by 100 to get
3.9107 * 100 = 391.07%
That’s how the interest is calculated on your payday loan.
The More You Know About Payday Loans, the Better
The only way to protect yourself from predatory lenders is to arm yourself with knowledge. Understanding how is the interest on a payday loan calculated is the first step in building your well of knowledge to turn into better decisions.
Did you like what you learned? Check out these articles in our learning center to find out more about loans and credit cards today.
Here are some other articles you might enjoy:
How To Find The Best Unsecured Credit Card
Are You a Good Candidate for alternatives to No Credit Check Payday Loans?
How to Get the Best Payday Loans Online Same Day
Short Term Payday Loans vs Personal Loans: The Complete Breakdown