Payday loan rates are higher than other forms of credit for a couple of reasons. First of all, payday loans are for a small amount for a short period. Lenders have to cover the cost of processing such transactions. Unlike mortgage companies, payday companies don't add up interest charges for 30 years.
Secondly, payday loans are at a higher risk of defaulting. Since there are no credit checks, people are more likely to fail to pay back these types of loans. That cost is passed onto everyone else.
Understanding The Numbers Rates
Most people get excited about APRs, annual percentage rate. If you compared the APRs of payday loans and mortgages, you will find the payday loan will have the larger number. But, that is misleading.
For one, payday loans are held for days, not a year. So you never pay that percent. With mortgages and other types of loans, you take years to pay the interest and principal. So with a payday loan, on average you would pay 15% of the loan in fees. With a mortgage, more than likely you will pay over 100% in interest charges.
Rates Lower Than Late Fees
Taking a look at late fees on some bills or credit cards, they can be significantly higher than the fee for a cash advance. Fees can also really add up with bank and merchant charges for bounced checks.
On average, a cash advance of $100 will have a $15 finance fee. Often bank fees average around $25 for each NSF check. Merchant fees are often higher. So while it will cost you for a payday loan, they are cheaper than paying late charges. You should also consider the impact on your credit report.
In the end, you have to decide if a payday loan is in your best interest. With instant service and fast cash, payday loan fees can be insignificant compared to other costs.
