If you compare the costs of loans that are unsecured or secured, you’ll see a range of different interest rates offered. Some lenders will offer loans that are less than 9% APR, while others might reach up to 27% APR. The interest rate you get will be decided based on several factors, such as your credit score, your income or your financial history in some cases.
When you look at the APRs offered by payday installment loan companies, the numbers are very different. The usual interest rates you will see are 300% annual percentage rate or APR or may be higher, with some calculations actually putting the APRs into the 500% or above range. The differences in APR show how some people have made the mistake of taking out a payday installment loan at the higher level and are now suffering the consequences.
Here is a hypothetical example: Let’s say James needs $100 right now, but doesn’t get paid for a few weeks. He decides to go to a payday installment loan lender and the lender decides to loan him the money he needs. Joe then writes a postdated check of $125 and the lender gives him the $100 he needs. When he gets his paycheck, the payday installment loan lender cashes Joe’s $125 check to complete the loan agreement. The whole process of borrowing and paying seems simple, but take note on how much it cost James to take out this instant cash loan.
When you think about the APR attached to this loan, you will be surprised just how much James had to pay for this small amount of money. To figure out the APR for a payday installment loan, you can use the following equation: APR=i x (365/n), where “i” is the periodic interest rate and “n” is the time period of the loan in days. In the given example, the periodic interest rate is 25% ($25 fee / $100 loan) and the time period is 14 days. When you calculate the formula with those numbers, you can see that the APR for this particular loan was 651.79%! This clearly makes payday installment loans more expensive than other types of finance. So you might ask why these payday installment loans are so expensive.
There are a number of reasons why these unsecured and short-term payday installment loans are expensive. First of all, there’s no denying that these loans are expensive because they are not designed for long term lending, which is what the APR system is designed to measure. Most payday installment loans are taken out over a period of weeks or at most a month and the borrower is charged a flat fee however long it actually is, rather than incurring interest just like other ordinary loans. This short term factor vastly inflates the APR figures, which in turn make payday installment loans look incredibly overpriced.
Typically, payday installment loan fees can be high with a $15 charge for interest for each $100 borrowed, some lenders may charge for even more. The basic reason for this is that these loans are available to almost anybody with or without a job, but they have an active bank account, and with some type of financial income. Also, the easier the approval process, the higher will be the risk for the lender, making the loan more expensive. The speed of the cash payout is a major benefit of payday installment loans that has also been a great contributor in making the loan expensive compared to traditional cash loans. Thus, the convenience and speed of these loans is why you pay a high cost for them.
You cannot deny that payday installment loans and other short-term instant cash advances are costly and expensive forms of borrowing. But if you only use them in an emergency and don’t extend the terms, you might feel the costs involved are outweighed by the convenience and speed of getting hold of cash to help you through a cash shortfall.