Payday Loan Costs

There are times in life when you might find yourself in a tight financial bind - maybe your car has broken down, or perhaps you have incurred an unforeseen medical bill.

Whatever your plight might be, you are in need of cash right away.

There are several options available to those who need short-term loans, but with the current credit crunch, those options have dwindled for many consumers.

For individuals who do not have other financial resources available to them, a payday loan might seem like viable option. However, there are several factors one should consider carefully before taking out a payday loan.

One of these factors is the true cost of the payday loan. If borrowers are not careful, their quick and convenient loan could turn into a financial nightmare. For this reason, it is essential that borrowers fully understand how the fees associated with payday loans are determined.

How Fees for Payday Loans are Calculated

For a payday loan, lenders typically charge anywhere from 10 percent to 25 percent of the value of the loan. It is important to note that the fee is tied to the total amount loaned, which includes the actual fee. For example, if a borrower cashes a check for $200, he or she might pay a $30 fee (equates to a 15 percent charge). However, the borrower will receive only $170 dollars - the $30 fee is withheld from the original $200.

To many consumers, a 10 percent to 25 percent fee might not seem like too much. If you are in a tight financial bind, paying $30 to access $170 might seem like a reasonable deal.

However, the way most payday loan customers get into trouble is by extending their payday loans, which are designed to serve as short-term loans and not loans that are paid off over the long run.

Here are a couple examples of how payday loan fees can add up if the borrower is not careful:

Example 1

Face Value of Personal Check: $500
15 Percent Fee: $75
Amount of Actual Loan to Borrower: $425
$75 Fee = 460 Percent APR (if the loan is repaid in two weeks)

Example 2

Face Value of Personal Check: $500
15 Percent Fee: $75
Amount of Actual Loan to Borrower: $425
$75 Fee = 460 Percent APR (if the loan is repaid in two weeks)
Borrower Rolls Original Payday Loan Over - Lender Charges an Additional $75 Fee
New Loan Amount: $575
Total Fees: $150
$150 Fee = 920 Percent APR (if the loan is repaid in four weeks)

As you can see, the fees can add up quickly if the borrower is not careful and does not pay off the loan as soon as possible.

How to Avoid Payday Loan Fees

Fortunately, there are some steps that borrowers can take in order to avoid getting trapped in the payday loan fee cycle.

Step 1: Shop around for a payday loan company that is running a special for new customers. You might be able to cut your fees by half or even avoid fees altogether depending on when you repay the loan.

Step 2: Make sure you borrow only what you need. When taking out a payday loan, it is important to set financial priorities and stick to them.

Step 3: Do everything you can to ensure that you can repay the loan within the minimum repayment window. The best way to avoid racking up payday loan fees is by not extending the repayment window time and time again.

Sooner or later, most people find themselves in need of quick cash. One option available to those in need of quick cash is the cash advance credit card.