When calculated, a $500 payday loan will cost you $546.225 after two weeks, $592.27 after 1 month and $773.95 after 3 months – and you can see the full breakdown below:
|Loan Term||Interest & Fees||Total Paid|
Payday loans are often used for emergency purposes and for people who are looking for a little extra money until their next payday from work (which is usually at the end of the month). The average loan is for around $300 to $500 and is used for a period of 2 to 4 weeks.
The APR for a payday loans is usually around 300% to 600% depending on the state you live in and your personal criteria, such as credit score and residential status which can impact the rate you are charged.
Whilst not the cheapest type of loan out there, it serves an important purpose, giving you the opportunity to borrow money fast for an emergency and receive the money upfront. Most loan applications are automated, hence applications are often completed and funded in under 1 hour or the same day of applying.
But using our example provided it is essential to know how much a payday loan costs – because it becomes more expensive the longer you borrow for and importantly, the fees really start to add up if you cannot keep up with repayments.
- The cost of a $500 payday loan is $546 after two weeks and $592 after four weeks
- Payday loans are fast and effective for emergencies, but they should not be used for long-term purposes
- Payday loans are expensive because they are unsecured and often have to compensate for a large default rate
- The APR is high because the loan interest is calculated as though it lasted a year, when it only usually lasts a few weeks
- If you cannot keep up with repayment, you could face additional late fees, added interest and a negative impact to your credit score
Is The Cost of a $500 Payday Loan Very High?
The cost of a $500 payday loan is relatively higher than other financial products such as credit cards or personal loans – but they are often used for just short-term purposes.
If you have an emergency expense such as a car repair, home repair or need to pay your rent, a payday loan can be effective to help you through a tricky time.
If you start using multiple payday loans, fall behind on payments or use “top-ups” (known as rollovers), this is where a payday loan becomes very expensive and can have a real drain on your finances.
Payday loans have their place, but you should always consider how you are going to repay them on time and avoid future debt or late repayment.
Why Are Payday Loans So Expensive?
Payday loans are expensive for a number of reasons:
They are unsecured – This type of loan is unsecured, meaning that you do not need to use any security or collateral when applying and therefore the lender has nothing to collect or repossess if you cannot repay your loan. This means that you eligibility is based on factors such as your income, employment and credit score – but the lender has to charge you a bit more than the average loan, because if you cannot make your repayments, the lender loses out and they cannot repossess anything to recover their debts.
They have high default rates – Payday loans have a high default rate, ranging from 15% to 25% depending on the lender and this is the percentage of customers who cannot make repayments on time or at all. It is therefore classed as ‘bad debt’ and the lender ultimately loses this money. Unfortunately, this means that rates need to be a little higher to make up for the losses of other people. Does this mean that good customers might be paying a little more for their loans? Yes, this may be the case, but thus is the nature of the product.
They are short-term – This source of finance is designed to be short-term and therefore the rates are higher to reflect this and also make it worthwhile for the lender. After all, if they are going to be lending you a large sum of money, such as $500 or $1,000 for just two weeks, it is a lot of risk for them and therefore they need to charge you a decent interest rate to make it worthwhile.
To give another example, a mortgage lender or bank charges low rates of just 3% or 5% per month, but the loan lasts for 5,10 or 25 years – so overall, the interest charged is relative to the duration of the loan.
Why is the APR for Payday Loans So High?
The APR for payday loans is very high, ranging from 300% to 600%, which is crazy high when you consider a credit card is around 16%.
But fundamentally what makes the APR so high is that the loan is treated as if it lasted 12 months, because this is how APR works, it is an ‘annual’ measure to make it easily comparable to other financial products.
In practice, it is like taking a product that only lasts 2 to 4 weeks and compounding it over and over, as though it were a yearly product, which makes the price appear more inflated and expensive. This is not to say that payday loans are cheap, because they are certainly not, but you could use other ways of comparing the price such as the daily interest rate or using a repayment example over 2 weeks or 1 month to get a good idea.
What Happens if You Cannot Keep Up With Repayments?
If you cannot keep up with repayments, this is where the cost of payday loans can really start to add up. With late fees and additional interest, the overall balance starts to mount up and it will also have a negative impact on your credit score, making it hard to get access to finance in the future.
There is a very rare chance that you will go to court over unpaid payday loans, unless you had amassed a huge debt. But to avoid any legal action and additional fees, you should always consider how you are going to repay your loan on time.