Unexpected expenses can leave you in an extremely difficult moment, and payday loans might seem like a quick fix. But the higher fees and the sky-high APRs can trap you in a cycle of debt.
Many of the borrowers even struggle to find their actual payday loan costs and APR calculations. The hidden fees, rollover charges, and excessive interest rates add up so fast that they might quickly turn into an overwhelming financial burden.
So, without a clear understanding of the true costs, the chances are you may get stuck in a cycle of repayment. Go on reading to understand payday loan costs and how effectively you can calculate all the relevant fees for your loan amount.
Payday Loan- A Quick Overview
Payday loans are a short-term and unsecured loan that is often known as immediate financial solutions. As the lender does not go through a hard credit score check, this is widely accessible to a large audience, even mostly to individuals with emergency and bad credit scores. When traditional lending can be challenging, the payday loan option offers a lifesaver option for them to manage urgent cash.
Though the loans are agreed in short terms, typically two to four weeks, they are associated with extremely high interest rates and annual percentage rates (APRs). Borrowers come to an agreement to repay the due amount just at the next paycheck.
In case you fail to repay in time, you will typically enter a constant debt cycle, which adds additional late fees and rollover fees if you take. Then the loan cost becomes more expensive. Other major states regulate the terms and conditions of the payday lender to prevent predatory practices.
How Much Can You Get With A Payday Loan?
The amount one can get with a payday loan depends on the lender and state regulators. Many states have strict laws on the limitation of the payday loan amount. You can lend as low as $10, which can go up to $1,000. However, the average loan amount is often between $300 and $500.
Every state has different regulations on the payday loan amount to set its limitations. Some set limits based on a flat cap. For instance:
- In California, you can borrow the maximum of $300.
- But in Texas, you can lend as much as $1,000.
- In Illinois, you can borrow up to $1,000 or 25% of gross monthly income.
- Indiana has set a limit up to $550 whereas in Virginia, you can lend up to $2,500, based on income.
Beyond that, many states, such as Idaho, Illinois, Nevada, Washington, and Wisconsin, set the amount limit based on the borrower’s income. Lenders typically require that the loan amount doesn’t exceed a certain percentage of your income, often around 25-50%.
For example, in Nevada, you can’t exceed up to 25% of your gross monthly income for a payday loan.
However, if you are in Washington, you can borrow up to 30% of your gross monthly income for a payday loan. Virginia set this limit to 50% of the consumer’s gross monthly income.
According to the CFPB statistics, the median payday loan on a two-week term is about $350. Some states even banned payday lending due to predatory practices. These states include:
- Maryland
- New Jersey
- New York
- North Carolina
- Pennsylvania
- Colorado
- Georgia
- Massachusetts
- Arizona
- Arkansas
- West Virginia
- Vermont.
How Much Do Payday Loans Cost?
Though payday loan terms are short, the fees are typically higher due to extreme interest rates and associated APR. Payday lenders usually charge a flat fee for every $100 you are borrowing.
This fee often ranges between $10 and $30 per $100. Though the flat fee sometimes seems small, the cost becomes higher and challenging to deal with when it is converted to an annual percentage rate (APR). In most cases, the APR can go as high as 400% or even higher.
Let’s have a quick glimpse at some of the common loan costs based on typical loan amount:
$5000 Payday Loan Cost
If you are willing to take a $5000 payday loan, you have to consider between $150-$300 as a monthly repayment. Payday lending is typically calculated based on the finance charge rate, which ranges from $10 to $30 for every $100 borrowed.
For example, if you lend about $5,000 from a payday loan option with a fee of $15 per $100 borrowed, then the charge you have to consider is $15 x 50,
or $750 in finance fees.
So in total, you have to repay about $5,750
that is, ($5,000 principal + $750 finance charge).
Now if you want to know the APR rate, which would be much higher, let’s say, you take a $5,000 payday loan with a fee of $20 per $100 borrowed for a 2-week agreement.
The APR would be approximately 521.43%.
$200 Payday Loan Cost
The finance charge for the $200 payday loan costs typically ranges from $10 to $30 for every $100 borrowed. In case your payday lender sets the charge at $20 for every $100 you are borrowing from them, the fees would be:
$20 x 2 = $40.
Sometimes, the fee can go $50, where the APR rate can be high over 1,000% on a $200 payday loan.
$1000 Payday Loan Cost
Payday loan cost for the $1,000 amount can range between $1,200-$1,500. However, the total repayment cost may vary depending on the payday lender, state regulations, and the set finance fee for every $100 you are borrowing.
If the lender charges about $20 per $100 borrowed and you have lent $1,000 for a 2-week loan, then the fee would be:
$1,000 x 20%
Or, $200
If you want to know the associated APR, it would be approximately 521.43%.
The fee charge can be much higher if you are not taking it seriously for the repayment date. Additional fees of rollover fees can set the amount even more when rolled over.
For example, if you take $1,000 but you are rolling it over for 2 months, you can be charged with additional fees.
Then the fee would be something like $600 due to 2 rollover fees.
And the APR rate will be 365%.
How High Are Payday Loan Interest Rates?
Payday loan interest rates are typically very high, often reaching hundreds of dollars in APR rate.
As already mentioned, the average finance charge for the payday lending is about 15%-20% for every $100 borrowed, which sets the APR from 391% to more than 521%. Depending on the flat fee charge and the fee in the debt cycle, it can go over 600%, and in some cases, even higher.
However, some states set the maximum interest rates that payday lenders can charge. For instance, in Colorado, the average interest rates the lender charges are about 129%.
If you are in Texas, the payday loan interest rate can reach more than 660%, while in California, it is up to 460% APR, depending on the loan amount and terms.
So overall, there is no specific range on how high a payday loan interest rate can be. It depends on the loan terms and local regulations.
How Is The Interest Rate On A Payday Loan Calculated?
It is simple to calculate the interest rates on a payday loan if you know the finance charge of the loan amount you have borrowed.
Typically, the loan is calculated in the APR rate. Here is the simple formula for APR:
APR = (The set fee on your loan / Loan Amount) x (Number of Days in a Year / Loan Term in Days) x 100
Let’s say you borrowed about $300 with a $60 fee for a 14-day loan term.
First, calculate the interest rate:
(Total Fees / Loan Amount) * 100%
So for your loan amount:
($60 / $300) * 100%
Or, 20%
If you are charged about $25 for each $100 for this loan amount, then the total fee would be $300 ÷ 100 × 25 = $75
Now, calculate the APR using the formula:
($75 / $300) × (365 / 14) × 100
= 0.25 × 26.07 × 100
Or, 651.79%
So, the APR for this loan would be approximately 651.79%.
In Closing
Payday loan costs and APR calculations are essential for a hassle-free lending experience. Though these types of loans may seem convenient, you may fall into a cycle of debt due to high fees and excessive interest rates.
If you use a payday loan, you must focus on the terms and conditions of your lender before you commit.
Always seek out a trustworthy lender. Verify their licensing and check for any consumer complaints with your state’s regulatory agencies. A lender with clear repayment schedules and transparent conditions can help prevent financial hassle during your most challenging moments.
Frequently Asked Questions
What happens if I can’t pay back my payday loan?
If you can’t pay back your payday loan, the chances are you may be charged with late fees or extra interest rates. Sometimes it can affect your credit score if the lender fails to collect the due amount even after a few tries. For instance, you can seek the rollover option from your lender which comes with an additional charge.
How can I avoid payday loan traps?
To prevent the trap of drastic payday lenders, you must review terms and fees before borrowing. Also, borrow what you can repay, or, consider other loan options with lower interest rates.
