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Payday loan rates can be a difficult concept to navigate. For a single transaction, there can be several different numbers and percentages thrown out from financial advisors and experts on every side of the issue. With further complications taking the form of recent press coverage of payday loan rate caps, special provisions for members of the military, and how the loans are meant to be used, it's no small wonder that the average payday loan rate is not so easy to determine.
Traditional payday loans work by offering consumers a flat, one-time fee for each $100 they take out. This fee varies depending on the lender, but most people can expect to pay anywhere between $10 and $20 for each $100. Most of the time, the lower end of this spectrum - the $10 charge - is an introductory rate. Typical consumers pay between $15 and $18.
This means that if you are taking out a $300 loan, you will have to pay the $15 three times, so you'll be required to pay back $345 when your loan term is completed. Reputable payday loan companies never have hidden fees or rates thrown into this number, so you should have a very good understanding of your payday loan rate when you sign on the dotted line. Anything dramatically above the $15-$20 per $100 might be a signal that your loan company isn't trustworthy.
The difficulty with payday loan rates comes into play when the APR (annual percentage rate) is calculated. In the financial world, there are strict state laws designating the maximum amount of APR that can be charged, generally topping out anywhere between 25 and 50 percent depending on the state. However, payday loans operate differently than traditional loans.
If you look at the fine print for your payday loan, you'll see that the APR often exceeds 200 or even 300 percent. This is because payday loans are meant to be paid back within 14 to 18 days of the loan origination date. Consumers who are unable to pay back the loan after the two weeks or so are up generally "roll over" or "refinance" the loan, meaning that they take it out for an additional two weeks, once again getting charged the flat fee of $15 to $20 per $100. When this extended flat fee gets translated into an APR (meaning you pay it every two weeks to keep the loan going), this means that you are looking at huge percentage rates.
State regulations are starting to step up and mandate the maximum amount of interest (or flat fee) that a payday lender can charge. This means that you may not have very many choices when it comes to visiting a payday lender on-site. However, online lending is a little bit different, since the lender you choose might not be required to follow the same guidelines.
While this is good news for those living in states where payday loans are no longer available, it does mean that finding a reputable company gets a little bit trickier. To keep yourself safe, always read the fine print to determine if you'll be expected to pay additional fees, and make sure that your price per $100 falls within the traditional boundaries. Anything excessively larger (or even smaller) might be a signal that you're in for more than you bargained for.