How Much do Payday Loans Cost?
Payday or cash advance loans are only intended to cover sudden financial shortfalls, not as a permanent solution. These loans are generally smaller, and have shorter terms, so they come with higher fees. Even though payday loans can cost more than traditional loans, they are simpler and do not require extensive background or credit checking.
Lenders defend their higher charges by saying that they provide loans to those that could not get them otherwise. Most traditional lenders don't like making small short-term loans- for instance, if a payday lender priced a loan in the same manner as a bank would, a $125 loan with a two-week term would only have about sixty cents in interest. Most states have set limits on lending fees, keeping the lenders from charging more than a certain amount of interest. However, some states have no limits, and a few have banned payday loans completely.
To offer more understanding of how payday loans work and how much they cost, use this example. A borrower needs $450 for two weeks, and the lender agrees to the loan in exchange for the borrower's postdated check for $520. The check pays the original loan amount, plus interest at a little more than 15%. When the two weeks is up, the borrower either repays the loan, the check is cashed, or the loan is rolled over.
When calculating the cost of a payday loan, you also need to consider the total APR and effective annual rate. APR and EAR are different; EAR is compounded and APR is not. Payday loans can be very useful in emergencies, but their fees can add up very quickly. It's a good idea to use them only when absolutely necessary and your personal financial situation dictates a very short-term bailout - nothing else!