Payday loans in the USA will typically cost around 300% to 500% APR depending on a number of things, including the amount you need to borrow, how long you need it for and the rate your lender is able to provide you. The rate your lender will provide you will be determined on your credit score, and by using a service like Pheabs you will be sure to get a good rate as our in-house team will find the best rate for you from a wide range of lenders. 

Rates may vary depending on whether you borrow money in Texas, or other states such as Florida or California.

However, with so many variables it can feel difficult to know how much your payday loan will cost you and how that compares to other ways of borrowing money.  There are a few things you can do to make your payday loan easier to pay off, for the sake of this article we will assume that the borrowing is making the payments they have agreed to.

Paying off a payday loan, woman at laptop

APR

The traditional way of comparing loans is by comparing the APR, which is When you look at the APR of a payday loan you may think it seems incredibly high compared to a more traditional loan, however this is simply because payday loans are not designed to be used for as long. APR based on annual measures of interest, which makes it superb for comparing products like mortgages or 12-month loans but not so perfect for measuring short-term loans like a payday loan.

For example, the APR on a mortgage might be 3% over 30 years. That means if you borrow $100,000 you will pay back $3,000, every year giving you a total cost of $90,000 to borrow the money. Whereas, for a payday loan with an APR of 300%, if you borrow $500 for 1 month, you will pay back your $500 and $125. This is because you are paying 300% back over a full year or 25% per month, as you only borrow it for a month you pay 25% interest; $125. 

APR is not always the best way to compare loans, as often different types of loans are best for different situations and different people. So how does it look when you compare payday loans to other ways of borrowing money and are they a cheap or expensive choice.

Woman counting money on a desk- cost of payday loans

The advantages of a payday loan

There are many advantages to a payday loan but some of the main ones are how quick and easy it is to get a payday loan. While the application approval process for a traditional loan or mortgage can take weeks or even months, a payday loan will often be in your bank the very next day.

Using an online payday platform like Pheabs means the application process will take only a few minutes and can be done completely from your home. Another huge advantage with payday loans is that they are available to anyone no matter your credit score. A poor credit score will not stop you from being approved for a payday loan, not to mention that the application process will not impact your credit score.

How does a payday loan compare to a…

Credit card

A credit card can be a good way to pay off off-peak Spencer purchases that you cannot afford at the moment. A possible APR for a credit card will be 19% (although rates vary on a number of factors), meaning you will pay off 19% of what you borrow every year.

For example, if you spend $1,000 and take 6 months to pay it back, you will be paying 1.6% of what you owe every month in interest, so the first month you will pay an extra $16 on what you owe. The issue with credit cards is that it can become difficult to keep a handle on what you are spending and credit card debt can mount quickly to a point that it becomes difficult to pay off. Not everyone will be accepted for a credit card and often those with a poor credit score will not be offered a good rate.

Another potential problem with credit cards is that they tend to hold a lot of hidden fees. fees for withdrawing cash – which will be around 28%, fees for not making minimum payments – referred to as default payments, fees to transfer your balance, late payment fees as well as some cards which charge annual fees just for owning the card. Although a credit card may seem like a good option because of the lower interest rates than a payday loan consider the potential impact of the extra fees and the temptation to over spend with a credit card, these might make it a less appealing offer.

How do payday loans compare to credit cards

Mortgage

A mortgage is a loan designed to lend a large amount of money for a long period of time. The average mortgage will take between 25 to 35 years to pay off, and are usually used for the purchase of a property. In reality, mortgages and payday loans are not very compatible, this is because a payday loan is designed to be used in the short term whereas a mortgage is designed to be used over years. With a payday loan you would not be able to borrow enough money to purchase a house, while a mortgage will not be that quick fix of a few hundred dollars for a month or two. 

Looking at the cost of a mortgage, if you purchased a house for $227,000 and got a mortgage with an interest rate of 4.33%, you repay it over 25 years, here is what you would pay. Every year on top of our repayments of the $227,000 you borrowed, you would also pay $6,040.72 interest, making your total interest paid $151,018.

Home mortgage loan rate compared to payday loans

Auto Loans

An auto loan will give you a lump sum to purchase a car, which you then pay back over time with interest. As with any loan, how good a deal you get will depend on the interest rates you receive. Getting approved for a loan through a dealership is often easier than with a traditional bank, however auto loans are often not always an option for those with a poor credit score, in this case a payday loan may be the better option. 

The national average for US auto loan interest rates is 5.27% on 60 month loans, although for someone with a less than perfect credit score interest rates can go up to nearly 20%. Let’s say you need to borrow $34,635 (the average for a new vehicle in America), if you take out an auto loan with a interest rate of 15% over 60 months you will be paying back $5,195 in interest alone every year for 5 years, a total of $25,976 on top of the $34,635 you pay for the car. If you take out a payday loan of $34,635 with an interest rate of 12%,not only will you pay back less interest, but you are tied into a 5 year contract. If you pay off over 3 years you will only be paying $12,468 in interest, making it a much better deal.

 

Auto loan                                                                                           Payday loan

Amount borrowed: $34,635                                                                  Amount borrowed: $34,635

Loan length: 5 years                                                                                Loan length: 3 years

Interest rate: 15%                                                                                    Interest rate: 12%

Total interest paid: $25,976                                                        Total interest paid: $12,468

Close up blue car with calculator and coin, Auto loan