A Payday Loan (also called a paycheck advance or payday advance) is a cash advance on your paycheck for a fee. More information on Payday Loans
The fees for payday loans are very high, usually excessive, if annualized. For example,:
For a $15 charge on a $100 2-week payday loan, the Simple APR is 26 × 15% = 390% but the effective annual interest rate (EAR) is (1.15^26 − 1) × 100% = 3,686%.
Careful reporting of whether EAR or APR is quoted is necessary to make meaningful comparisons.
Payday loans are targeted toward people with poor credit. Expecting people with poor credit to use payday loans wisely is not realistic. It may sound good to have a short term loan until you get paid but many find they have to roll the payday loan over into a new loan. With the very high interest rates, often well above 20%, the borrower can quickly find themselves owing more in interest than what they borrowed!
For example, lets say you borrow $100 for $20 for 2 weeks and have to roll this over 4 times so you pay the loan back in 10 weeks. How much would you owe?
Five weeks times $20 would let you think you owe $100+5 x $20 = $100+$100=$200 but the 20% rate is applied to the new balance so your amount due is
Thus the ability to borrow $100 at "payday loan rates" means you own $251 in just 10 weeks if you don't pay it back when due.
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