If people knew the true cost of a payday loan, perhaps the industry wouldn’t be growing like cancer. AllFinancialMatters breaks down the math.
Let’s say times are tough and Jack needs $100 to fix his car. Jack goes down to the local payday loan company and they agree to give him a loan. So Jack writes a check for $125 and gives it to the payday company and they give him $100. Two weeks later, Jack gets paid and the payday loan company cashes Jack’s check, closing out the deal.
Now, take a wild guess as to how much the APR (Annual Percentage Rate) is on Jack’s loan…
How about 651.79%!
Here’s how that’s figured:
APR = i
i = periodic interest rate, which is 25% in this example ($25 fee
$100 = .25 or 25%)
n = time period of the loan, in this case 14 days
Filling in the numbers, our formula looks like this:
APR = .25
APR = .25
APR = 6.5179 or 651.79%
Hopefully the same subset of the population that might seek a payday loan crosses over with The Consumerist reader demographic… — BEN POPKEN