The Truth About Payday Loan APR Rates

You’ve probably heard about the high interest rates payday lenders charge, but are there any better alternatives to get quick cash? Payday lenders are known for APRs in the lower to upper hundreds, but are you really paying 500% interest or more on your loan? The answer involves taking a look at other lenders who perform similar services and doing a little math. First, we need to understand what a payday loan is and how these online loans operate.

A payday loan is a short-term cash advance on your upcoming paycheck. These types of loans are not based on your current credit score. Instead, the payday loan company looks at your current employment and deposit history before approving an amount². Other companies that perform similar services are pawnbrokers, credit payment plans, banks’ overdraft protection, credit card cash advances, employer paycheck advances, or in some cases, you could directly ask your family or friends. Given these choices, a payday lender is not a hard choice to make.

The most common use for a payday loan would be to protect yourself against an overdraft fee from your bank. For instance, a bank usually charges approximately $30 if you do not have enough money in your account to cover the expense. Without a bank’s $100 overdraft protection, you’d pay back $130 if you overdraw your bank account by $100. With a payday loan the fee is $18.62, bringing the total to $118.62. It makes more sense to avoid an overdraft fee with a payday loan. The other benefit is not hurting your overall credit score through overdraft charges because payday lending is not based on credit scores². Keep in mind that online lenders’ fees vary, and the amounts stated here are based on rates from MyCashNow.com.

How Payday Loans Lending Really Works

Have you ever wondered how payday lending practices really work from the inside? Is it really as bad as people think? Are the APRs really in the 500% range? These are only a small sample of questions people ask when the cash advance topic comes up, and you can make assumptions based on your own knowledge, but are you accurate? Payday lending is a service that helps customers get needed cash very quickly. Compared with other lending alternatives, a final breakdown of the fees can be seen below.

• $100 14-day payday advance with $18.62 fee = 484.45% APR
• $100 bounced check with $48 overdraft fee and/or merchant fee = 1,251% APR
• $100 credit card balance (assuming full payment, not including interest) with $26 late fee = 678% APR
• $100 utility bill with $50 late and/or reconnection fee = 1,304% APR

Based on the above data, you can clearly see that payday loans are the best alternative, but the APR associated with them is very distracting. Payday lenders do not compare their fees with traditional loans. Instead, they compare rates to other nontraditional lending providers such as bank overdraft fees, credit card cash advances, late fees, and penalties. The provided APR is based on a full year instead of the real two-week interval in which payday loans are paid back. The actual percentage rate is 18.62% if repaid in full within the allocated timeframe. These rates may vary from lender to lender and may also depend on regulations in the state in which the borrower resides.

Being Smart with Payday Loans

Payday lending is never seen as a great idea, but they do exist to help customers meet basic financial obligations. If you had to choose between not paying your power bill and applying for a cash advance on your next paycheck to keep the lights on, which would you choose? Most people would choose to keep basic utilities running, because it is a necessity that can be covered in the near future.
The only problem is getting stuck in the payday advance routine, because a borrower fails to recognize the actual amount borrowed vs. the amount needed to repay the loan. This loop can drain accounts very quickly if not monitored on a regular basis.

Aside from financial emergencies, there is one other situation where a payday loan is a smart choice. If your bank’s overdraft fee were more than the lenders interest rates, then it would make sense to save money by choosing a payday advance. For example, if your bank charges the standard $30 penalty for bounced checks on a coverable amount of $100 that would leave you with a $130 obligation. With a payday loan, the fees may vary from lender to lender, but they should be much smaller than the overdraft fee. For example, My Cash Now charges $18.62 on a 14-day, $100 payday loan. You only need to fill out a loan application the night before you need the money deposited into your account, and if you’re approved, the money will be usually be in your account the following business day¹.