Payday loans are a quick and easy way to get cash for unforeseen expenses such as household bills and repairs. These loans are to be paid back with your next paycheck, usually in a week or two. Before taking out a loan it is important to know how they work and how much they cost. Payday loans offer you a small amount, generally between $100 and $2000, and charge rates.
What Is the Interest Rate on a Payday Loan?
With payday loans, you are charged a set of fees and interest rates. However, there are strict regulations imposed by the government which lenders must follow. So, the annual percentage rate (APR) is a tool of measurement for payday loans across a yearly period.
It’s obvious that all borrowers are looking for a payday loan with a low-interest rate. But many information services warn against high APRs and excessive cost of loans. Actually, there is no reason for panic. Interest rates for payday loans are large but at the same time misleading because the actual cost of the loan is different for the period in which the loan is active. By its nature payday loans have a very short life cycle that lasts usually between two weeks and a month, which equals the break between paydays.
The interest rate for payday loans is not high; it is usually around 1% a day or less. On the contrary, it is APR that is really high. On average, payday lenders charge from 1000% to 5000%.
To understand such high rates, we need to find out what APR is. This is the index that calculates the interest rate for a full year. This is not a correct measure of interest for credit because typical payday loans are given between 14 to 30 days. It means that a borrower who takes a loan for two weeks doesn’t pay 1000% interest on the sum he takes out, the rates and fees will be much lower depending on the loan period.
To summarize, an average rate charged by payday lenders is around 1 % a day. This is the rate that covers the cost of loan providing. But if we calculate APR it will amount to intimidating numbers of thousands of percent.
However, if you are interested in the real price of a loan, APR is not the most accurate measure of it. To find out whether the company has the best payday loan rates or not, turn to its FAQ and Terms and Conditions pages to clarify a daily percentage rate.
Moreover, payday lenders are encouraged by the government to state clearly the cost per $100 borrowed, typically it is between $25 and $35. This helps customers to compare lenders and choose the one with the best payday loan rates. In addition, some online lending services have loan calculators that allow you to know how much you pay back and when. Next time you are planning to take a payday loan, read thoroughly the terms and conditions, and check the fees and rates to be charged.