Payday Loan Interest Rates: Here’s What You Need To Know

Payday loans seem like a fast answer to a financial crisis. You get quick cash with no credit check and few requirements. That convenience can get you into trouble. Payday loan interest rates are astronomical and most borrowers end up regretting their loans.

Let’s take a closer look at payday loan interest rates and how they can lead unwary borrowers into an inescapable debt trap.

Payday loan interest rates

The interest rate is the fee you pay for using the lender’s money. The higher it is, the more expensive the loan is. Interest rates are compared by using an Annual Percentage Rate or APR, which puts all the loans you’re comparing on equal terms.

Here are the interest rates for some common forms of loans.

  • Payday loan interest rates range from 391% to over 600% APR
  • Tribal payday loan interest rates range from 300% to over 800% APR
  • Title loan interest rates average 300% APR
  • Credit card interest rates range from 15% to 30% APR
  • Personal Loan interest rates range from 14% to 35% APR
  • Online lenders typically charge from 10% to 35% APR

Lenders that don’t do credit checks, like title, payday, and tribal lenders, tend to have very high interest rates. 

Those interest rates impose crushing costs. The Pew Charitable Trusts reports that the average borrower takes five months and multiple loan rollovers to pay off their loans. If your APR is 662%, taking five months to pay will mean paying $1001 to pay off a $300 loan. 

How are payday loan APRs calculated?

Payday lenders typically don’t quote an APR. Instead, they will charge a loan fee, usually between $10 and $30 for each $100 you borrow. That sounds like you’re paying 10% to 30%, but that’s not the case.

The average payday loan term is only 15 to 30 days. You may only be paying 10% to 30% of the amount you borrow, but when you convert that to an annual basis, it translates to APRs of 300% to 600%.

How to calculate the payday loan APR

Payday lenders won’t tell you the APR on their loans, but you can calculate it yourself. For example, let’s say the loan is $300 for 14 days with a fee of $20 per $100 borrowed.

Here are the steps for calculating the APR.

  • Divide your loan total ($300) by 100, and get 3.
  • Multiply that by the fixed fee ($20) per $100: your finance charge is $60.
  • Divide the finance charge by the loan amount ($300) and get .2.
  • Multiply that result (.2) by the number of days in the year (365) and you get 73
  • Divide that total (73) by the number of days in the loan (14) and you get 5.21.
  • Multiply the result by 100 and you get your annual percentage rate: 521%.

If that’s more math than you’re prepared for, you can use a payday loan APR calculator like this one.

Some states prohibit payday loans

Payday loans are regulated by state laws, and laws vary widely from state to state. 

Twelve states ban payday loans altogether. Another 18 states have a rate cap of 36% on a $300 loan. And 45 states and the District of Colombia have rate caps on a $500 loan, but the rate caps may be high.

Some states impose almost no regulations. In Texas, annual percentage rates on a $300 loan may be as high as 662%. If you borrowed $300 and paid it back in two weeks, you’d pay back $370.

These laws have a real impact. Short-term loans are four times more expensive in states with few controls on payday lending.

What is a payday loan and how does it work?

Payday loans are short-term loans designed to be paid back in a single payment, generally on the borrower’s next payday. The loan term is usually two weeks or less.

Payday loans do not require a credit check. All you need to qualify is a bank account and proof of income, which includes Social Security or other benefits.

Payday loan interest rates and fees are high, and many borrowers can’t repay the loans on the due date. They end up rolling the loan over into another loan, the fees and interest escalate, and they are caught in the payday loan trap.

What’s the difference between a payday loan and a tribal payday loan

Tribal loans have some features in common with payday loans, including extremely high interest rates. The difference is that tribal lenders base themselves on Native American tribal lands and are registered as tribal businesses.

Tribal lenders claim that this feature entitles them to sovereign immunity under a legal ruling allowing self-government to tribal groups. Tribal lenders use this immunity to ignore state lending laws.

These lenders charge huge rates and fees, change the terms and rules of loans midstream, and even threaten prosecution in tribal courts. Tribal loans are installment loans with a longer term than payday loans, giving the interest more time to pile up.

The problem with payday lenders

Payday lenders almost always force borrowers to provide a post-dated check or authorize a direct withdrawal from their bank account. 

If the account has insufficient funds on the due date, the lender will make repeated attempts to deposit the check or withdraw the money. Each attempt will generate a large fee from the bank, piling further costs on top of the loan’s interest and fees.

Even borrowers who pay their loans often find themselves out of money and looking for another loan before their next paycheck.

This is why more than 90% of payday loan borrowers regret their decision!

The dangers of predatory lending

Predatory lenders prey on desperation. Their clients need cash urgently. Most have bad credit or no credit and are excluded from conventional sources of credit. Lenders offer the bait of quick funds without a credit check or a conventional application.

Once the bait is taken, predatory lenders are ruthless. They lock borrowers into an inescapable cycle of debt and squeeze them until they can’t pay another cent.

Payday loans and tribal payday loans are among the most visible predatory lenders, but title loans deserve a special mention. The title loan trap often ends with a borrower paying back far more than they borrowed and then losing a desperately needed vehicle.

What happens if you default on a payday loan

If you fail to pay a payday loan, the lender may sue you. If they win they can garnish your wages. They may also sell your account to a debt collector, who will pursue you aggressively and may take you to court.

You can be sued over an unpaid payday loan until the statute of limitations expires. This varies from state to state, but it’s often six years. 

If you are sued, always respond or appear when requested and follow all instructions of the court. You can’t be arrested or jailed for not paying a debt, but you can be jailed for refusing to follow court instructions.

Most payday lenders do not report to the credit bureaus, so missed payments will not hurt your credit. If your debt is sold to a collection agency they will report it and your credit will be affected. 

Payday loan extended payment plans

An extended payment plan, or EPP, gives borrowers more time to pay their payday loans without accumulating excessive interest. 18 states now require payday lenders to offer EPPs and others are considering similar legislation.

In states that don’t require EPPs, look for lenders that belong to the Community Financial Services Association of America if you have to take out a payday loan. Members are required to provide EPPs.

You may have to ask your lender if they offer an EPP, and you will have to apply a day before the loan payment is due. The lender may not tell you if you don’t ask.

An EPP Is not the same as a rollover

Many lenders will suggest a loan rollover. This is not the same thing as an EPP. An EPP gives you an extended period to pay at a reduced interest rate that will not cause your loan balance to explode.

A rollover is a new payday loan on top of your old one, often with a hefty fee attached. An EPP will make your situation better, a rollover will make it worse.

Payday loans and the Military Lending Act

The Military Lending Act (MLA) caps interest rates on loans to active duty service members (including active Guard or active Reserve duty) at 36% APR. The APR includes interest and any other fees. 

Most payday lenders will not lend to service members, because their rates are far above this level. If you are a service member and you think a lender may have violated your rights under the MLA, contact your nearest Judge Advocate General legal assistance office.

Other consumer loan options

Payday loans may not be the only choice if you need money. You may also be able to borrow to pay off a payday loan and pay off the new loan on more reasonable terms.

Consider these options.

Cash advance apps

Cash advance apps like Brigit, Dave, and FloatMe allow you to draw cash advances to get you through to the next payday. The advance may be free, though you will pay a small monthly fee to use the app. 

Advances are only available to existing app users, so they won’t bail you out of a current problem.

Personal loan

A personal loan will offer a better interest rate and a longer-term than a payday loan, making them much easier to pay off. Many personal loans require good credit, but some lenders, like Upgrade, Upstart, and LendingPoint, specialize in serving borrowers with impaired credit.

Balance transfer credit card

Balance transfer cards offer an extended zero-interest promotional period. You transfer your loan balance onto the card, and if you pay it off within that period you can pay only the principal, without accumulating more interest.

Most balance transfer cards require good credit, so they may not be an option for most payday loan borrowers.

Payday Alternative Loan

Many credit unions and local banks offer these loans designed to help customers avoid or escape the payday loan trap. These are typically short-term loans that take the place of a payday loan with much lower interest and fees.

Ask your bank or credit union if they offer this service.

Debt management plan

Debt management plans (DMPs) are offered by non-profit credit counseling services. Most offer a free initial consultation to assess your situation. The counselor may recommend a debt management plan.

If you sign up for a plan, you will make one monthly payment to the counseling agency. They will pay your creditors and negotiate for better terms. Debt management plans typically reduce your interest rates to 8% to 10% APR

These plans require discipline and many people don’t complete them, but they can be an effective way to get out of debt. Be sure to check the agency’s reputation and reviews to see if they are legit!

Feeling trapped? Here are eight ways to get out of a bad payday loan:

If you’re stuck in the payday loan trap

The payday loan trap is a vicious cycle. You feel like you’re working for the lenders instead of for yourself, and it may seem like there’s no way out. That’s what the lenders want you to feel: like there’s no option but to keep paying them.

You do have choices. If none of the options above works for you, or if you’re looking for something different, DebtHammer’s proven program may work for you, as it has worked for thousands of others.

We’ll put together an easy-to-understand plan for our services with no hidden fees, obligations, or gotchas. Schedule a free consultation today!

The bottom line

If you have bad credit and are desperate for cash, a payday loan may seem like the answer to your problems. In fact, it will almost always make your problems worse. Payday loan interest rates and fees are designed to trap you in a cycle of debt that will end with you paying far more than you borrowed. Avoid payday loans — even if it seems like there’s no other option.

If you’re already caught in the payday loan trap, don’t give up. You’re in a bad situation but there are ways out. Start with the options above and don’t give up!

FAQs

What’s the difference between a payday loan and an installment loan?

A payday loan is a short term loan. You pay the entire amount, plus any fees and interest, in a single payment at the end of the loan term, usually on your next payday. An installment loan is paid back in several installments over a period of several months or even years.

What is the Truth in Lending Act?

The Truth in Lending Act (TILA) is a federal law that applies to all credit and lending activities in the US. It does not control the terms that lenders can offer, but it requires full disclosure of loan terms and costs. Lenders have to reveal these costs on the loan application.
The TILA is enforced by the Federal Trade Commission and the Consumer Financial Protection Bureau.

What is the difference between a payday loan and a title loan?

A payday loan is unsecured. There is no collateral for the loan. If you can’t pay your account will be sold to a collection agency. The lender or collector may sue you.
A title loan is secured by the title to a vehicle. If you fail to pay the lender can repossess the vehicle and sell it.

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