Yes, payday loans carry high Annual Percentage Rates (APRs). This APR includes standard fees and an interest portion, typically resulting in a rate between 261% and 782%. Yikes!
Due to their short-term nature and high risk for borrowers, payday loans are the rickety bridge tempting you to walk across financial straits. Why? Let me explain.
Bottom line, payday loans are one of the most expensive loan options out there. A few factors contribute to these astronomical rates.
Firstly, payday loans are unsecured, which means borrowers aren't required to provide any collateral. Due to this increased risk, the lender must charge higher fees to make it worthwhile.
Secondly, these loans usually cater to individuals with poor credit scores or unstable incomes who might not qualify for traditional loans. These high-risk borrowers further justify the increased costs.
The short-term nature of payday loans also compounds the issue. They're designed to be repaid by your next paycheck, often within two weeks. When you calculate the APR (which represents the cost of a loan over a year) for such a short-term loan, the figure naturally skyrockets.
Learn: How is the interest rate on a payday loan calculated?
Plus, if you can't repay the loan in time and opt to roll it over (extend the loan for another two weeks), you'll be charged another round of fees because you’re basically taking out a new loan.
On average, for a loan amount of $345, the rollover fee is around $51.75. Consequently, in the next two weeks, you would be obligated to repay a total of $396.75, inclusive of the original loan amount and the rollover fee. That’s how a simple $300 payday loan can turn into a vicious cycle of debt within the blink of an eye.
Learn: Are payday loans safe?
While payday loans might seem like a handy solution for immediate cash needs, don't forget about their hefty price tag. Always consider cheaper alternatives and plan your repayment carefully. And if a payday loan is your only option, be smart and ensure you can afford to pay it back on time! 💪💡