If you are a first-time borrower, terms like interest rates, annual percentage rates (APR), and financial charges can be quite confusing. This article answers the basic questions about payday loans interest rates to give you an idea. You can also use our Payday Loan Calculator for estimates. Take note, however, that the figures used in the examples are not the actual ones. The exact fees and terms depend on the lender and the state you are in.
What Is an Average Interest Rate on a Payday Loan?
Loan amounts vary between $100 and $1,000. You can get instant approval and get the money either on the spot or deposited into your bank account.
In general, lenders will charge an interest rate between $15 and $20 for every $100 you borrow. The interest rate is calculated based on the annual percentage rate or APR. That interest rate can vary between 400 percent and as high as 600 percent. Therefore, you need to compare lenders first before choosing.
You also need to consider your finances and determine whether the loan will not further put you on a financial strain. You can use a loan search engine that allows you to compare lenders within your state instantly. All you need to do is enter the basic details of the loan you are looking for and it will generate matches for you.
The loan term is between 14 and 30 days. In other words, you have to pay the loan on your next payday. For repayment, you have two options:
- You issue a post-dated check that coincides with your next payday
- You allow the lender to automatically deduct the money from your account on your next payday.
Make sure that your money is enough in your account when the lender collects the payment. you are unable to repay on time, it can incur extra charges and you’ll find yourself in a bigger financial mess.
What Is the APR for a Loan That Charges $25 to Borrow $300 for 14 Days?
The average APR of $300 with a finance charge of $25 depends on how it will be calculated. If the $25 interest rate is charged for every $100, that will be a total $75, and the APR will be 651.7 percent. That’s an extremely high APR. But as already stated above, this is a typical APR for payday loans.
But, let’s say, the $25 charge is for the whole $300, the APR will be around 217.26 percent, which is significantly lower.
In the first quote, the interest rate is at 25 percent while on the second figure, the interest rate is at 8.33 percent. However, this rarely is the case because finance charges are usually for every $100 you borrow. The next section will be a more detailed explanation of how we are able to get these figures.
How Do You Calculate the Interest Charges of a Loan?
In order to find out the APR of a $300 loan that has a $25 charge, you need to understand first how the APR is calculated: Here’s the step-by-step process of how to calculate the annual percentage rate or APR of a payday loan:
- Step 1: Divide the amount of the interest paid by the amount you borrowed.
- Step 2: Multiply it by 365, which is the total number of days in a year.
- Step 3: Divide the product by the length of the repayment term.
- Step 4: Multiply the quotient by 100.
To give you a clearer perspective on how the calculation works, here’s the mathematical representation of each step using the data we have, which is $300 (loan amount) and $25 (finance charge) for every $100. So the total finance charge will be $75.
- Step 1: $75 ÷ $300 = 0.25
- Step 2: 0.25 × 365 = 91.25
- Step 3: 91.25 ÷ 14 = 6.517
- Step 4: 6.517 × 100 = 651.7%
That’s an extremely high APR compared to other loan types.
But let’s assume that the $25 charge is for the whole $300, the calculation will look like this:
- Step 1: $25 ÷ $300 = .083
- Step 2: .083 × 365 = 30.416
- Step 3: 30.416 ÷ 14 = 2,172
- Step 4: 2.172 × 100 = 217.26%
With all these figures, imagine how much more charges the loan will incur if you failed to pay your loan on time.
For example, if you failed to pay the $300 within the 14-day repayment period and decided to roll over the payday loan, the total amount you owe becomes $468.75, if we use the $25 per $100 calculation. The total amount you borrowed is $375, plus the finance charge of $93.75 = $468.75.
The amount you borrow and the finance charge get bigger if you continuously fail to pay your loan month after month. So it is advisable to look at your finances first before you decide to take out a payday loan.
Payday Loan Alternatives
If you really need immediate cash, there are other ways to get the fund you need without getting a payday loan. Some of them include:
Family and friends
It is the least expensive alternative in the list. If it’s not a big amount of money, you can ask help from family and friends, promising to pay it with a small interest. Just make sure to pay them back at the time you promised to prevent any bad blood between you and them.
Non-Profit Credit Counseling Agencies
These agencies offer free financial advice to people on how to get out of debt and create an affordable budget every month. They can also refer you to organizations that offer assistance to people who are going through a financial crisis.
Paycheck Advance
A lot of companies have these benefits; thus, it never hurts to ask if you need emergency cash. Paycheck advance works by getting the money you have earned before your paycheck arrives. For example, if you have worked for ten days already but your paycheck is not due for another week, you can get the pay for the ten days you’ve worked for. That amount will be deducted from your upcoming salary.
Credit Unions or Community Banks
These are traditional loan organizations that offer smaller loans with low interest rates and easy repayment plans. Go to your local credit union or community bank and inquire about loan options. If you are looking for low-interest payday loans, Capital Pacific can connect you to licensed lenders that match your needs. Our loan matching service is free of charge. You can also use our Payday Loan Calculator to get an idea how much it will cost you.
