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How Does Payday Loans Calculate Interest?
Payday loans enable the acquisition of short-term loans using a post-dated check written for
the amount borrowed plus a fee as collateral, granting immediate access to money. Fees vary
slightly, depending on the borrower's state of residence and each particular lender, but
generally remain equivalent to an annual interest rate far higher than with other types of loans.
Pay day loan lenders include interest and loan fees together in one bulk amount that
the borrower pays for each loan period. The loan fee is generally between $10 and $30
for each $100 borrowed for two weeks. Therefore, if you want to get a payday loan for
$300 and the fee is $15 per $100 you borrow, you have to write a post-dated check for
$345 that the lender will deposit in two weeks. If you cannot afford to pay the loan in
full when it is due, most lenders allow you to pay the fee again to roll over the loan for
another two weeks. In this case, you would pay $45 to borrow the $300 for another two
Convert Fee to Interest Rate
Calculate the equivalent annual interest rate with some simple math. Divide the loan fee
by the amount you borrow to find the percent interest during that loan period. For
example, $45/$300 is 0.15, or 15 percent. Divide this by the number of days you are
borrowing the money to find out the daily interest rate. In this case, 15 percent divided
by 14 days is 1.07 percent interest per day. Multiply by 365 to calculate the equivalent
annual interest rate. In this case, it is 391 percent.
Use an online payday loan calculator to estimate your annual cost and the equivalent
interest rate, given the amount you borrow and the fees you pay. Enter the amount of
the loan, the fee per $100 and the length of time you may borrow the money before
incurring further fees. Some online calculators estimate one year as 52 weeks, which is
only 364 days, so results may differ slightly than manual calculations.
Payday Loan vs. Credit Card
Although payday loans advertise a low-cost alternative to borrowing with a credit card, they are
far more expensive than credit cards if the borrower rolls over the loan. Even if the borrower
uses a high-interest cash advance on a credit card, the annual interest rate is rarely more than
30 percent. Consumers who have available credit and anticipate needing longer than two
weeks to repay the loan, a credit card may be a better, less expensive option than a payday
Payday loans are a very expensive way to borrow money. The annual interest rate on these
loans can be in the hundreds, even thousands, of percent. With debt consolidation, the
borrower takes out a single low-interest loan and uses that money to pay off several smaller,
high-interest debts. While this may sound like an ideal option, if you are relying on payday loans
to get you through to the end of the month, you probably do not have the credit score to
qualify for an affordable debt consolidation loan.