A man with a payday loan.

Lesser Known Payday Loan Facts

Payday Loans are an all too common form of lending these days. They provide some quick money but they also have some big drawbacks. Take a look at these payday loan facts that you might not be aware of. Some of which might get you out of a jam.

What You Might Not Know

You might think that you know about payday loans, but there still may be some things that might surprise you. Take a look.

They Have High Interest

You should know this already but not everybody thinks of payday loans as having interest. What the lender will state and stress is the loan fee.

An example of a loan fee might be $25 for every $100 borrowed. That means if you borrow $200, you will need $250 to pay off the loan. On the surface, that might not seem too bad to you. After all, you are in a jam and you need the money. Paying a fee of 50 bucks may seem somewhat reasonable, especially if you are under duress.

The problem comes when you calculate what the interest rate would be. Taking this example, let’s say that the loan is for a 10 day period, fairly common. The APR on this loan, because of the short term, would be 912%. Average credit card interest is 17%, but even if you had a card with bad credit, your interest rate would probably be around 29%. So, obviously a payday loan has an insane amount of interest.

Charging a fee instead of interest allows the lender to escape usury laws.

Most People Renew Their Loans

The vast majority of people who take out a payday loan cannot pay it back when the loan is due. With 80% of payday loans, the borrower is either forced to renew their loan or immediately take out a new loan.

The problem is that most people who use payday loans are living paycheck to paycheck. When an emergency expense happens they take out a payday loan and hope to be able to pay it back when it is due. If you are already spending every penny of your paycheck, how are you going to be able to do this?

So, what happens when you renew? When you renew a loan, you pay off the loan fees from the first loan period and then a new set of fees would be charged. So, using the first example, if you originally borrowed $200 it would have cost you $250 to pay off your loan. Now, with the renewal, it will end up costing you $300.

They Are Not All Called Payday Loans

There are a lot of apps these days that look to profit like a payday loan but do not call themselves payday loans. They allow a person to borrow money and then tip the app when they pay the loan back. The tip is not required but a tip amount will generally be suggested.

The problem with these apps is that the tip amount suggested comes very close to the amount payday loan lenders charge. Sure, you do not have to pay the tip but people feel obliged to do so and they may lose access to funds if they never tip.

There May Be A Way Out

You may have ways to get out of your payday loan, but it depends on what state you live in and/or what organizations the lender is a member of.

Many states and some lending associations require payday loan providers to offer their borrowers an installment loan if they get into trouble. If this is the case, you may be able to break up your loan into much more manageable, smaller chunks.

Take a look at your lender website and look for any affiliations that they might be advertising. Then, visit these websites and look for their rules or simply email them.

Next, take a look at your state and see what requirements your state imposes. Some will have maximum loan fees, loan amounts and many may even require that a lender give you an installment loan.

You should also check on whether payday loans are even legal in your state. Many lenders operate exclusively online and may not respect state laws on payday loans. If you find this to be the case, do not think that you can just keep the money. You will still have to pay back the principal, but loan fees should be waived.

Finally, consider more traditional financing. That payday loan was quick and easy and got you through your jam. Now that you have more time, look into a more affordable installment plan either online or from a local lender. You might be surprised at what you can find, even if you have bad credit.

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James Car is a finance, loan and budget expert based in the United States. After attending Brookhaven college, he went on to become a successful entrepreneur. He now enjoys writing articles that help people save and make the most of their money.