Why Are Payday Loans So Expensive?
When you compare unsecured or secured loans from different companies, you'll see a range of different interest rates offered, from the great value to the more expensive. Some lenders will offer finance at less than 9% APR, while others might reach much higher, with up to 27% APR being charged in some cases. The rate you get will be decided by a range of factors, such as your credit, whether any security is offered, your income, etc...
However, when you look at the APRs offered by payday loan companies, the numbers are very different. It's not unusual to see interest rates of 300% APR or even higher, with some calculations actually putting the APRs into the 500% and above range. Clearly, this makes payday loans much more expensive than other types of finance. Why is this?
First of all, while there's no denying that these loans ARE expensive, the figures are a little misleading. Payday loans are not designed for long term lending, which is what the APR system is designed to measure. Most payday loans are taken out over a period of days or at most a few weeks, and will be charged a flat fee however long it actually is to your next wage, rather than incurring interest in the ordinary sense.
This short term factor vastly inflates the APR figures, making the loans look ludicrously overpriced, when in fact few people will (or should) be charged those high figures as the loan is not kept long enough.
Nonetheless, the fees involved can be high - $15 for each $100 borrowed is typical, with some lenders charging even more. The basic reason for this is that the loans are available to almost anybody with a job and active bank account, and with all types of finance, the easier the approval process the higher the risk to the lender - and so the more expensive the credit will be.
Also, the speed of cash payout is a major benefit of payday loans, and as with anything, you tend to pay more for convenience and speed.
No one can deny that cash advances are at the costlier end of borrowing, but if you only use them in an emergency and don't extend the term, you might well feel the costs involved are outweighed by the convenience and speed of getting hold of cash to see you through a budget shortfall.
August, 30
