How Much Is That Payday Loan In The Window?

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

(365

n)

where…

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

(365

14)
APR = .25

26.0714
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

Just How Expensive is a Payday Loan? [All Financial Matters]
(Photo: ozczecho)

Comments

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  1. DeeJayQueue says:

    yeah but you can’t keep that loan open for a whole year. Even if you could, if you needed to you’d have bigger problems in your life than a payday loan. I don’t like these companies any more than the next person, but I don’t see how you can apply annual type rates to short term loans.

  2. Ben Popken says:

    @DeeJayQueue: Many payday lenders have mechanisms so the loan keeps rolling over. Basically just pay a minimum fee every two weeks and it keeps the loan alive. In any event, APR is just a measuring mechanism and using it doesn’t require the loan be actually kept open for a whole year.

  3. mattshu says:

    Once upon a time prior to getting my degree I managed a branch of one of these legal loan sharking companies (fortunately I quit just before completely losing my soul). By law we had to print the APR on the forms the customers had to sign. It was not uncommon to see the APR in the 800% range, but the highest I ever saw was 1700%.

  4. VG10 says:

    is it me or do payday loans seem to focus in on illegal workers? myself, im financially stable. i could however see the need for people with little income having emergencies to get by. If $25 is all that stands in your way of fixing your car or not having a job, its a small price to pay even at 600%+. I do think that these pay-day loan companies need to be regulated….

  5. TheCase says:

    I agree with DeeJay – this is really more of a hefty service charge than it is a interest rate. I don’t think the logic applies.

    If were to take that line of reasoning against third party ATMs:

    You need the money “now” and are unable to wait until you can get to your bank’s ATM. So, you take the hit and eat the additional charge to get your money. In this case, we’d have to say that the interest charge is astronomical, approaching infinite, as the money is taken from your bank in seconds.

  6. Artki says:

    > Let’s say times are tough and Jack needs $100 to fix his car.

    Yeah, the payday loans have absurd APRs. On the other hand, not having a working car and missing work and getting fired can be REALLY expensive. I sure it would make more sense to put the repairs on a credit card. Obviously, Jack doesn’t HAVE a credit card. It would make more sense to take the money from his emergency savings. Ahem.
    In an emergency example like you gave in your note, the payday loan doesn’t seem like that bad a deal. Using a loan like that to buy a TV set or something would be STUPID.

    Think of the payday loan as a lender of last resort. Unless you’re willing to give Jack the money at a better rate, who are you to criticize the lender?

  7. Using a loan like that to buy a TV set or something would be STUPID.

    Despite what they’re claiming in the new Payday Loan Association (or whatever they’re calling it) ad, that’s excatly what they tell people to do. All those ads include the suggestion of using it just to have some extra money around or to pay for a vacation.

    Unless you’re willing to give Jack the money at a better rate, who are you to criticize the lender?

    Just because they’re the only option for people like Jack doesn’t make it ok for payday lenders to gouge people. Besides, Consumerist is a blog not a bank so it’s that they can’t give Jack a loan, not that they’re not willing too. That’s like saying they can’t criticize Wal-mart because they don’t operate a huge chain of stores.

  8. Bourque77 says:

    Face it folks loan sharks arent that bad as far as a percentage rate is concerned. Although they are a little harsher when you dont pay up.

  9. medalian1 says:

    I wish I owned a payday advance place! I don’t see anything wrong with them.

  10. shoegazer says:

    @case: The ATM example doesn’t apply, cause you’re withdrawing your own money, and anyway, the charge is fixed up to your maximum withdrawal (at least in the UK). The CFSA “helpfully” compare their loans APRs with the fees that banks charge on bounced checks, missing credit card fees etc. (It’s on the same link, further down). I agree that, between a bounced check and a payday loan, the latter may be more helpful, but it still doesn’t excuse some of their charges, their loan structuring, and the blatantly targeted advertising that encourages poor people to give up any hope of financial planning and just “live for today – because you deserve it.”

  11. joeblevins says:

    How much should a Pay Day Loan place be allowed to charge someone to loan them money? We are talking about a segment of the society that can’t even come up with $100 bucks to fix thier car. If you don’t have the credit or access to a quick $100, are you really a good credit risk?

    These companies couldn’t make money if they were forced to only charge little amounts of interest.

    Again, we are dealing with the lowest segment of the American population, legals or not. They need to be serviced as well, if it isn’t profitable, then no one will lend them money.

  12. roamer1 says:

    The Peach State outlawed payday lending a few years ago but is set to bring it back…with some caveats (for instance, loans couldn’t be rolled over, and payday loans to members of the military would be illegal, mostly because of complaints from base commanders.)

    IMO, there’s certainly a market for small loans to credit-challenged people, but “fringe banking” such as payday lending, title pawn, etc. is the wrong way to address it; trying to mainstream people into more traditional credit products (heck, even the worst subprime credit cards have better terms than payday lenders!) seems like it would make more sense in the long run.

  13. Its pretty heavy amount but the payday loans are made for very small time. If a customer increases his repayment day then it is his fault. Any way i accept that the amount is high and Mr. Jack had an expensive car repairment. But at least he managed to repair. These lenders have come with a good idea about payday loan advances but one should make sure before applying for it as it may become a nightmare for borrowers if not paid on time.