Actually Calculating the Interest Paid on a Payday Loan

Actually Calculating the Interest Paid on a Payday Loan

I am not sure if it is that I am fortunate or that I am obsessed with my personal finances but I have never had to take out a payday loan.   However, I have always been curious as to what these loans actually cost to the borrower.

The Pros of Using a Payday Loan

These types of loans are often criticized (probably with good reason as we do some calculations below), but I have to believe they have some positives or they wouldn’t exist.  According to LaunchLoans,

    • Personal loans are fast – Get quick approval on your personal loans and receive the personal loans funds often by the next business day
    • Personal loans are convenient – Apply for personal loans from your home – no waiting in line, no extra paperwork and no faxing required to apply for personal loans
    • Personal loans are personal – No need to feel awkward waiting in line at a personal loans store. With online personal loans, you apply for your personal loans from the comfort and privacy of home
    • Customize your personal loans – Choose your personal loans amount, select your personal loans repayment schedule and create the personal loans options that fit you best
    • Personal loans allow you to reach your goals – Our personal loans are designed to be more than just a fast cash personal loans solution. Personal loans can be the starting point for major life changes. Use personal loans to your discretion to get your finances back on track; use personal loans for home repairs; or use personal loans to deal with longstanding personal loans money needs

They don’t seem to mention it in their list of pros, but they are unsecured also,  which would be a huge pro as a well.

But at what costs do these pros come? The Negatives of Payday Loans

Calculating the Interest on a Payday Loan

While it is easy to list the pros, but when talked about by other personal finance bloggers or the mainstream financial media payday loans always come down to the price (i.e. interest).

Since most payday loan sites don’t provide their fees without signing up and I am not willing to sign up I will take an example from wikipedia,

Due to the extremely short-term nature of payday loans, the difference between APR and effective annual rate (EAR) can be substantial, because EAR takes compounding into account. For a $15 charge on a $100 2-week payday loan, the APR is 26 × 15% = 390% but the EAR is (1.1526 − 1) × 100% = 3,685%. Careful reporting of whether EAR or APR is quoted is necessary to make meaningful comparisons.

Woah, 3,685%! However, if we were to compare those numbers to an overdaft fee they don’t look all that off! I had to search and search on chase.com and eventually had to contact customer support.  The customer rep told me that the insufficient fee was $34! So figure out the EAR on going over your checking account by $5!

It should be noted that Chase also offers overdraft protection but that costs $12 a month when you use, making effectively the same as the wikipedia example.

 

I hope to never use a payday loan, but it doesn’t seem all that horrible if you are equipped with all the information.  Am I missing something?

8 Responses to Actually Calculating the Interest Paid on a Payday Loan

  1. You’re not missing something. If anything, it’s that the people who are constantly borrowing with payday loans probably aren’t all that responsible with their money, anyway.

    If you need the money, you need the money. Studies have shown that the high interest isn’t exactly lining the payday loan companies pockets either. Reason magazine says their profit margins are in line with other financial services companies.

  2. That’s crazy! I’m with you… I hope to never need to use the services offered by payday loans.

    But if the need arises, we do what we have to do, as long as it’s not a trend…

  3. I agree with krantcents. Payday loans should be one of the last resorts with money borrowing, but often they help who just need a bit more money in the month. Not for people who want to get rid of any substantial debt.

  4. No, I don’t think you missed anything. It’s true the fees one pays on these loans, when figured out, do have a high interest payback. But, there are a lot of people who have no where else to turn and sometimes getting a no credit check personal loan is the only way to cover an emergency.Great article and I know your readers will benefit from this.

  5. i recently needed to use this site for help paying my rent. my husband left me with all the bills and no money. after almost 2 months of paying 500.00 towards a 400.00 loan. apparently i was only paying the fee. i was so mad that no matter what i still owed them 400. do not unless u absolutely have to use these sites. i learned my leason the hard way.

    • Not that I have any experience with these types of establishments, your comment is almost impossible to believe.

  6. well evan i thought so to. before i posted on here, i spoke to them they wouldnt let me speak to a supervisor < an told me i was paying the 100.00 to extend my loan. not actually pay the loan itself. doesnt bother me either way if u choose not to believe it. i am mad as hell, an that's why i posted my comment. it made me feel better.

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