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How Much Does A Payday Loan Cost?

Payday loans may be an option if rising expenses make it difficult to pay your bills. Payday loans, which are usually only for a few days, serve as cash advances on your next paycheck.

How payday loans work

You contract with a lender to provide you the money you need to get you through until your paycheck comes in. You agree to pay high interest rates and repay the loan when your next paycheck arrives.

Be cautious about payday loans, though

Payday loans may sound appealing. It can also be a way to borrow the money you need in order to pay your bills. However, payday loans can be very expensive (see the What It Costs section to learn more about the high interest rates, and related fees). If not careful, the loans can lead you to further debt.

If you live paycheck-to-paycheck and have little to no money for extra expenses (which is often the case when you take out a loan), you could find yourself in deeper debt. It can be difficult to break this vicious circle. One source says that it is quite common for borrowers renew their loans or to take out new ones 12 times a year.

Different concepts, same loans

A variety of finance companies, lending agencies and online businesses offer payday loans. These loans can be found online by searching for them or responding to ads that appear in newspapers, magazines, and on radio. 

Even mail-in offers for payday loans may be sent to you. There are many ways to get payday loans. But the names used on these loans can also vary. 

Payday loans can also be called cash or check advance loans. Although the names might sound different, the principle and cost of payday loans can be used in the same way.

What are the requirements for payday loans?

● A bank account is required if you are looking to get a payday loan. 
● Because you will be repaying the loan, you will need to have a job or another source of regular income.
● You may also be asked to produce a pay stub to prove your income.

What you should know before getting a payday loan

Before you sign any paperwork to obtain a payday loan, it is important that you know upfront the cost of the loan. By law, the lender must disclose all terms and conditions of the loan. This includes the interest rate and any fees. 
You should also inquire about the repayment arrangements and how the loan works. Some loans can be set up to automatically renew, and the charges are automatically taken from your checking account. Others require that you write a check to cover your loan. The check will then be cashed on the payday to repay the fees and loan.
You may also be charged additional fees if your bank account does not have sufficient funds to pay the fees and the lender can put through the check three times to verify that the money clears.

Different payday loan laws apply to different states

Payday laws are governed by state laws as well as federal lending regulations. Currently, this practice is allowed in most areas of the country.

However, there are restrictions and rules that may be enforced in certain states. Payday Loan Consumer Information allows you to view the state information for each state. The Summary of State Laws of the National Consumer Law Center gives a detailed overview of each state’s terms and limitations.

The amount you can borrow, the interest rate cap, the repayment period, and the recourse available to lenders if you default on your loan payments all vary from one state to the next. 

Payday loans are also prohibited in many states. These residents can access cash loans online, but they are subject to additional costs and risks.

Payday loans available online

Experts advise that you do your research before agreeing to any online loan. Online loans are often more expensive than local ones. Lenders believe that consumers will find the convenience worth the additional cost. You could also be at risk of identity theft or other security issues if you give your financial information online.

How much does it cost?

There are many factors that can affect the total cost of a payday loan. You can expect to spend more depending on where you live, which is why some states have a cap on interest rates. There are also “low cost” lenders who charge lower interest rates than others. Internet companies may charge more. The fees charged by these lenders are usually based on the amount borrowed.

The cost of borrowing a payday loan

All these factors combined mean that a payday loan could cost you anywhere from $15 to $30 per $100 borrowed for a short period.  You have to pay the interest and fee every time your loan matures.  It is possible that the lender might rollover the loan including the interest if you do not pay up on time. Here is an example:

You have applied for a payday loan worth $400 that has a repayment plan of two weeks. The loan attracts a fee of $80.  When you pay the loan on time, the total amount will be $480. But if you extend the loan to 6 months, the total cost of the loan will be $480 in fees (this is a fee of $80 for every month (up to 6 months), on top of the original amount which was $400. The total amount will therefore be $880.  You may therefore end up paying twice what you borrowed.

What is the fee limit for payday loans?

Sources that monitor payday loans suggest that fees for these loans can range from $400 to $800 percent annually, depending on how much you borrow. Sometimes, the APR may be higher. Experts have even pointed out loans that can charge up to 1200 percent. Despite the higher interest rates, it is still one of the most popular types of loans.
If you are a resident of a state with a limit on small loans, there may be some protection that protects you from the lenders charging you this money. 

Other borrowing alternatives to consider

With payday loans, you may be able to get extra cash quickly to pay your bills. However, it is worth considering other options due to the costly nature of these loans.

  • Cash advances on your credit card at high interest rates, such as 30 to 50% APR, can be much cheaper than payday loans in states that do not have a cap. 
  • Talking to creditors may be possible to work out a payment plan
  • You can obtain a short-term loan from your local credit union. These loans often have lower interest rates. 
  • Compare the fees, finance charges, and APR of different loan options to make informed decisions

These are exceptions for military personnel

To prevent lenders from exploiting these protections, the federal government has recently placed important safeguards in place for military personnel. 

Lenders cannot charge more than 36 percent APR, and the amount must include all fees. Even with these limitations, a payday loan can still be a costly option that helps you make ends meet.

 

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