Payday loan lenders have a bad reputation as sharks, preying on low-income earners in a time of need. Typically, a person will apply for a payday loan when they need cash instantly since it requires very little personal financial information to be approved. For those with bad credit and immediate needs, a payday loan seems very attractive indeed. In fact, this is exactly how payday loans get their name – they are meant to bridge the gap between paychecks when a person needs a small amount of money for a short amount of time.
However convenient payday loans may appear, their interest rates can seem astronomical. The average interest rate on payday loans in the U.S. is about 400%, and it can be even double that figure. To put that in perspective, the average interest rate on credit cards is roughly 16%, according to Credit Karma. The extreme interest rates on payday loans receive much backlash and contempt. But why are they so high? Is it just a case of payday loan lenders being greedy and exploiting money-strapped people?
That isn’t the full story. According to Forbes, payday loan interest rates are so high because they have to be. Otherwise, payday loan lenders wouldn’t be able to keep running their business. Tim Worstall calculates that in order for payday loan lenders to have a business, with a storefront and employees, and to cover the costs of defaulted loans, they’d have to charge an interest rate of 264%. If they simply charged that rate, they’d make no profit.
Though that number may look high, Worstall argues that we need to look at it a little closer to figure out what’s really going on. Payday loans typically don’t have an APR since they are meant to be for the short term, like two weeks. So, they instead come with a lending fee which you pay back with the original loan. Let’s say the lending fee for a $100 loan is $20 for two weeks. To calculate the APR, you would multiply the $20 by 26, how many payday cycles there are in a year. Thus, you have an “interest rate” of 520%. But many loans don’t get rolled over for an entire year, so payday loan lenders must charge high lending fees in order to turn a profit on small value loans.
This does not mean that payday loans are safe to take whenever you want. That’s precisely the danger in them. They seem like a quick fix, easy cash, without the hassle of bank applications and whatnot. But, if you don’t pay them back as soon as your next paycheck comes in, things could quickly spiral out of control. You could end up paying thousands of dollars for a loan that was a fraction of the cost.
That’s where Progressive Debt Relief can help. We specialize in assisting clients get back on their feet after being buried by payday loan debt. The cycle is extremely hard to break, since the fees can quickly snowball on you. If you’ve found yourself trapped by the inability to pay off your payday loans, give us a call immediately for a free consultation at 1-877-590-1847.
