Why Payday Loans Are So Expensive

Payday loans are expensive due to their fee-based structure and high interest rates. Learn why they are so expensive and how you can avoid them.

Why Payday Loans Are So Expensive

Payday loans are a type of loan that can be used to cover emergency expenses or to pay off other debts. They are usually offered by a store, online lender, or credit union, and require a valid ID, proof of income, and a bank account. The APR for payday loans is high because it is calculated for a year, even though the loan only lasts a few weeks. This already inflates the interest rate, which is more than the average personal loan to cover transaction fees, the fact that it is not guaranteed and there is a higher default rate than other types of loans (about 15-20%).But all this together and you get a payday loan APR that ranges from 400% to 500% in the U.

S. and about 1,000% in the United Kingdom. The fee-based structure makes these loans expensive compared to other types of loans. Lenders argue that there are high rates because payday loans are risky. Personal loans are a much broader category and usually offered by a bank, credit union, or online personal loan lender.

You'll usually need to provide them with proof that you'll eventually be able to repay the loan. Personal loans are normally for much larger amounts of money than payday loans and have much lower interest rates and charges. In general, a personal loan will be cheaper than a payday loan. Payday loans may seem like an easy and quick solution to a short-term problem that needs fast cash, but they actually cost a lot more than traditional loans. Because of the high interest rate, many people end up owing more than they originally borrowed and don't pay the payday loan.

This can easily create a debt cycle. Many states now regulate interest rates on payday loans and many lenders have withdrawn from states that do. The Loan Shark Prevention Act would limit interest rates on credit cards and other consumer loans, including payday loans, by 15%. Customers can use payday loans to cover emergencies, such as doctor visits or car problems, but most use the loans to cover utilities, rent, or other recurring monthly bills. You may think that a payday loan is the only solution to handling an emergency bill, or even to pay off another debt, but the truth is that a payday loan will end up costing you more than the problem you are trying to solve. Payday lenders offer cash advance loans, check advance loans, post-dated check loans, or other types of short-term credit.

That's much lower than the current average APR of 391% on payday loans calculated by St. Louis Federal Reserve. You should be able to enjoy them and you can always pay the paycheck with the help of a payday loan. Payday lenders say your high interest rates are misleading, because if you repay your payday loan on time, you won't be charged high interest rates.

Leave Reply

All fileds with * are required