Why are Payday and Installment Loans so expensive?

Private lenders take a great deal of risks when giving out unsecured personal loans. A recent study shows that 15-25% of consumers default on payments on loans of this type. Due to the high-risk nature of the loans, lenders must charge an appropriate rate of interest in order to provide this valuable consumer service when prime credit methods of borrowing money have been exhausted. These loans are not a long term solution for credit issues. Lenders will only make loans to consumers that have represented the ability to pay back the loan.

What is the typical APR and interest rate that I will pay?

A.Payday loans vary greatly. The typical interest rate is 15% to 30%. The APR is usually between 400% and 1600% depending on how long and what interest rate was for the loan. The shorter the term on the loan and the higher the rate of interest, the higher the APR. APR is a calculation that shows what the annual rate of interest would be IF you had the loan over a course of a year. You would not, therefore APR is only indicative of a representative cost of the loan for the duration of time that you had the loan outstanding.

How much will a loan cost me?

A. Interest rates on payday and installment loans very greatly depending on the lenders jurisdiction. Payday loans typically carry an interest rate of $15 to $35 per $100 borrowed. This needs to be paid off at the end of the term of the loan… your next payday. Many lenders will allow you to refinance the loan and only pay the interest fee. For example, you take out a $500 loan until your next payday. The interest rate is $25 per $100 borrowed. You will need to repay the interest fee of $125 plus the principal balance of $500 for a total of $625 on your next pay day. If the lender is willing to allow you to refinance, you typically will only need to pay the interest fee of $125. The $500 principal will still remain and another $125 in interest fees will be due on your next pay day. In order to pay off the loan you will need to pay of the entire principal balance and any outstanding fees. Personal installment loans work similarly, but the interest is accrued over the course of the loan, exactly like a mortgage or a car loan. You will pay more interest than principal at the beginning of the loan. Following is an example of an installment loan:

Interest Fee Principle Payment Total Payment Outstanding Principle
$ 8.63 $ 15.43 $ 24.06 $ 384.57
$14.52 $ 9.54 $ 24.06 $ 375.03
$14.14 $ 9.92 $ 24.06 $ 365.11
$13.78 $ 10.28 $ 24.06 $ 354.83
$13.39 $10.67 $ 24.06 $ 344.16
$12.99 $11.07 $ 24.06 $ 333.09
$12.57 $11.49 $ 24.06 $ 321.60
$12.14 $11.92 $ 24.06 $ 309.68
$11.69 $12.37 $ 24.06 $ 297.31
$11.22 $12.84 $ 24.06 $ 284.47
$10.74 $13.32 $ 24.06 $ 271.15
$10.23 $13.83 $ 24.06 $ 257.32
$9.71 $14.35 $ 24.06 $ 242.97
$9.17 $14.89 $ 24.06 $ 228.08
$8.61 $15.45 $ 24.06 $ 212.63
$8.02 $16.04 $ 24.06 $196.59
$7.42 $16.04 $ 24.06 $179.95
$6.79 $17.27 $ 24.06 $162.68
$6.14 $17.92 $ 24.06 $144.76
$5.46 $18.60 $ 24.06 $126.16
$4.76 $19.30 $ 24.06 $106.86

How much can I borrow?

A.Most lenders, regardless of whether the loan is a payday or installment loan, will offer up to $500 for first time customers. In certain cases lenders will loan more, but it is very rare to get over $1000 as a first-time consumer. Once a repayment history is established with a lender, they will typically increase the amount in which they are willing to lend. Loan amounts for returning or good customers tend to max at $750 to $1000 or more.

What do I need in order to get a payday or installment loan?

Qualifications vary greatly amongst lenders, but here are a few common ones:
Steady income – typically from employment, but sometimes benefits payments are allowed. You usually need at least $1200 in monthly income Bank account – typically checking accounts are the only accounts lenders will look at. The account needs to be in good standing and able to accept ACH credits and debits
Active phone number(s)
State Issued ID
Proof of residency
Many lenders will verify income, bank accounts, contact information, etc. Although bad credit is ok, many lenders will use sub-prime credit bureaus in order to make credit decisions. For more information on this topic, please speak to your lender.

What is the difference between a payday loan and an Installment loan?

A.A payday loan (also called a payday advance) is a small, short-term unsecured loan. The loans are also sometimes referred to as "cash advance loans". The repayment terms are typically tied to a consumer pay date. An installment loan is a loan that is repaid over time with a set number of scheduled payments. The term of loan may be as little as a few months and as long as 30 years. For personal, unsecured installment loans, the duration is usually 6 months to a year.