On average, a $5,000 payday loan will cost you $863 in finance charges — and, if you fail to repay it by your next payday (in two weeks), it'll cost you a lot more than that.
A payday loan, despite its ease and quick processing time, comes with a downside: a seriously high annual percentage rate (APR). The APR for a payday loan is most commonly around 450%, but can range from 261% all the way up to 782%. 😬
Learn: Are payday loans ethical?
So, to get a better understanding of the cost of these loans, let's imagine you take out a $5,000 payday loan with a 450% APR. Well, what exactly does that mean in terms of cost?
Most lenders express the cost of a payday loan as a biweekly fee ($10 to $30) that is charged every... you guessed it... two weeks (the intended term for a payday loan).
The APR on the other hand is reflective of the cost of your loan if you were to delay repayment and incur that biweekly fee for an entire year — which IS NOT how these loans are intended to be used as they are a type of short-term loan.
Learn: How do payday loans work?
So, if you borrowed $5,000 at a 450% APR, you'd be looking at owing a total of:
- $5,863, in two weeks.
- $6,726, in four weeks.
- $7,589, in six weeks.
* This is not including any late, rollover, or convenience fees that a lender might charge in addition to your standard finance charge.
But you'd repay your loan in two weeks, so no biggie, right? This is the wishful thinking of most borrowers. But, the harsh reality is that over 80% of payday loan borrowers do not manage to repay their loan on time and end up renewing or rolling it over — spiraling them into a nearly inescapable cycle of debt.
Learn: Are payday loans safe?
So, while a payday loan might seem like an easy way to get a quick $5,000, know that it can be a pretty costly and risky way to borrow.
For that reason, I would say it's always worth your time to explore other options before diving headfirst into a payday loan. So, before committing, ask yourself:
- Are there lower-cost personal loans you could apply for? (I'd recommend looking into installment loans!)
- Can you negotiate payment plans with your creditors?
- Is there any unnecessary spending you can cut?
It might take a little more time and effort, but it could save you a bundle in the long run. 😌💖
If a payday loan is indeed your only option, always read the fine print to know exactly what you're getting into, and — if you plan to take out a $5,000 payday loan — ensure your next paycheck will more than cover it while still taking care of your other financial needs.
Be smart with your money, and it'll serve you well. 🧠💲😉