Calculating the cost of your payday loan can be difficult. There is a lot of information out there meant to help you become educated on the different lending options and interest rates but often, it can get confusing having to navigate through it all.
- Which is the best payday lender?
- Which is the average fee for a cash advance?
- How does your credit score affect your interest rates?
If you’ve found yourself asking these questions, you’re not alone. Many people have resorted to payday lenders in order to fix their short term financial problems. Research by the St. Louis Federal Reserve shows that more than 12 million Americans have used payday lenders. And although there are other options to be considered when in need of a boost in personal finance, payday loan companies seem to only be growing in popularity.
Hopefully, by reading this article, you’ll feel safer and more confident using these services as an informed borrower. This article will outline what payday loans are, what they are used for, what their alternatives are, and how it works when you are unable to pay them back.
It will also outline what merchant cash advances are, and how they are used to provide cash advance options for businesses rather than individuals.
Why Take out a Payday Loan?
Life is unpredictable. As a hardworking member of society, you might still find yourself running into unexpected expenditures. Maybe your car broke down and needs fixing, maybe your electricity bill was higher than expected on a cold winter month, maybe your children need something that requires you to think outside of the box for a few weeks. This is where payday loans come in handy.
These loans help people who need a cash infusion before their salaries get into their bank accounts. They can be anywhere from 50$ to 1000$, depending on the advance amount you need. Typically, you pay them back during your next pay cycle, meaning you’d be ready to get rid of your debt within two weeks.
There are multiple payday loan companies that can help you through this process. By far the easiest to use is Payday Loans Pro. They are a trusted team and you can often get your loan within a single business day. Here are all the documents you’ll need:
- To be over 18 years of age
- Identification (ID, driver’s license, or passport)
- A recent pay stub
- A bank account number
Then you can either post-date a personal check for the date of your next paycheck or give the company access to automatically withdraw it from your bank account.
And there it is! You’ll be given the amount of cash you need and can get on with paying for what you need to pay. It can be quite simple. At the same time, however, things can get tricky when you’re uncertain of whether you will be able to pay it back within two weeks, or if your credit score is too low and is affecting your interest rate negatively.
The interest you pay on a payday loan will vary from company to company.
What is the Average Fee for a Payday Loan?
While it does depend on where you choose to get your loan from, payday loans tend to have one of the highest interest rates in the market for personal finance. The average annual percentage is 391%, but it can often go up to 521%. This means that you should explore your other options first.
If you decide to take a payday loan, it is important that you make sure you are able to pay it back within the two weeks, or once you receive your next paycheck since you will be charged more fees on top of your original cash advance fees if you have to delay the repayment process.
At Payday Loans Pro, the 391% fee translates to $15 out of every $100 you borrow. Meaning that at the end of the two weeks, you will need to return $115 for a $100 loan. This is one of the lowest interest rates in the market, yet it can climb up if you are unable to pay them back on time.
If you are unable to pay the loan back in time, you will be charged another 15$ on top of your current payment. You will have another two weeks to pay back the full amount.
What is an Annual Percentage Rate?
The concept of an annual percentage rate refers to the annual rate of interest that is charged to borrowers. APR is represented by a percentage that shows you the actual yearly cost of funds over the term of a loan or income earned on an investment. This includes any fees or additional costs associated with the transaction. The APR provides consumers with a real number that they can easily use to compare with rates from other lenders.
The annual percentage rate for payday loans is one of the highest in the market when compared to other forms of credit. While payday loans annual fees range from 391% to 521% and over, other alternatives have different APRs:
- Credit cards (15%-30%)
- Debt management programs (8%-10%)
- Personal loans (14%-35%)
- Online lending (10%-35%).
It is important to consider these alternatives when looking into personal finance, as cash advance fees can get quite significant if not paid back on time. However, within the world of payday loans, Payday Loans Pro provides some of the lowest interest rates.
The Truth in Lending Act (TILA) of 1968 mandated that lenders disclose the APR they charge to borrowers. While credit card companies can technically advertise monthly interest rates, they are still also required to report the APR to customers before they sign an agreement.
Here is an example of a payday loan from a simple interest calculator:
Mike takes out a $400 loan from Payday Loans Pro to help pay a car repair. Payday Loans Pro charges him a $60 fee on his $400 loan. What is the APR?
Step 1: Add all fees and interest charges to calculate total fees. Payday Loans Pro only takes 15% of your total amount or $60 in this case.
Total fees (given) = $60
Step 2: Divide the total fees by the amount borrowed.
$60 / $400 = 0.15
Step 3: Multiply the answer by the number of days in a year: 365.
0.15 x 365 = 54.75
Step 4: Divide the answer by the term of the loan in days. Typically Payday Loans Pro gives 14-day loans.
54.75 / 14 days = 3.91
Step 5: Move the decimal point two places to the right and add a percent sign.
Answer: 391% APR on this loan
There you can see how lenders arrive at the 391% number. Although this is not the cheapest option out there, it can be a good option for those just looking for short term help to just get cashback.
What is the Difference Between Credit Card Loans and Payday Loans?
Generally, credit cards are the cheapest option for those looking for a short term loan. Credit card interest rates are usually lower than payday loan options. Often, you can get a credit card from your financial institution and have it directly attached to your debit card, making repayments easier for you. You are also able to do a balance transfer from your bank account when getting a payday loan from most institutions, including Payday Loans Pro.
When using a credit card, you are also able to make monthly payments, which can be done with a much lower minimum payment than payday loans, where you are expected to pay all of it back at once.
However, since credit cards have a higher amount of credit for you to take out, it is also normally easier to rack up credit card debt. Credit card cash advances can be a good deal if you do not have a tendency to spend more than you are able to pay back. So in order to make sure your lending is a one time deal, payday loans can be a good option for you.
Most lenders approve anyone with a credit score over 600.
How Does Your Credit Score Affect Your Interest Rates?
In order to understand how your credit score might affect your interest rates, you first need to understand what your credit score is and what it means.
Your credit score is determined by three major credit bureaus, TransUnion, Experian, and Equifax. They track your credit history throughout your life and come up with your “borrower’s profile”, therefore establishing the factor at which you are at risk of defaulting on your loans.
This is how FICO determines a score and puts you into a category. Although most of the process around determining credit scores is secret, we do have some insight into what some of the elements that are considered are. Here are some of them:
- Payment History (35%)
- Amounts Owed (30%)
- Length of Credit History (15%)
- Credit Mix (10%) (meaning that lenders prefer people who have taken credit for different purposes, such as car payments and mortgages, than people who have only taken out short term loans)
- New Credit (10%) (when companies run hard credit checks on you for a new loan, that information stays on your record and can reflect badly on you if there are too many of those. One of the positives of Payday Loans Pro is that they do not do hard credit checks, so you can inquire with them without harming your credit score)
Knowing your credit score is a requirement every time you wish to take out any sort of credit. More often than not, your bank or credit union will be able to tell you what your FICO score is, but in case that is not a possibility, the three credit bureaus mentioned above (TransUnion, Experian, and Equifax) will provide you with a copy of your credit score, as you are entitled to by law.
Here is a breakdown of what your credit score could look like:
- 300 – 579 is considered a poor credit score
- 580 – 669 is a fair credit score
- 670 – 739 is a good credit score
- 740 – 799 is a very good credit score
- 800 – 850 is an excellent credit score
Most lenders approve anyone with a credit score above 600. You might still be able to get a loan if your score is below that number; however, it is normally harder to do so. Bad credit can be a hindrance to your ability to get a personal finance loan, so make sure you keep that score up! That said, it is still possible to get bad credit loans.
There are several ways to improve your credit score, such as:
- Maintaining a healthy credit card balance
- Making your payments on-time
- Limiting hard credit checks
- Keeping your lines of credit open (not closing down credit card accounts too soon)
- Being careful with debt consolidation (meaning you shouldn’t take out a singular loan in order to consolidate different types of debt you might have)
- Diversifying your credit profile (this is the opposite of the above – keeping and paying off different types of credit, such as car payments and student loans, allow lenders to see that you are a trusted borrower)
When Do you Have to Pay Your Payday Loan Back?
You are typically expected to pay your loan after two weeks time (14 days) when you receive your next paycheck. You want to make the date of payment coincide with the date of your paycheck so you can make sure there is no confusion.
In order to complete the payment, you can either post-date a personal check for the date of your next paycheck or give the company access to automatically withdraw it from your bank account.
Payday Loans Pro will also allow you to roll over the loan for another two weeks if need be. This will, however, make you incur more fees on your overall total cost. The process of a “rollover” loan will be explained in the next section.
What Happens if You Can’t Pay it Back on Time?
If you’re unable to make your payment within the two weeks allotted for your original loan, you are able to do something called a “roll over” loan, meaning that you are able to take two more weeks to pay your loan back with added fees.
At Payday Loan Pro, if you were charged $15 on the first $100 you originally borrowed, by rolling over your loan two more weeks, you will be charged $15 more. If you are still unable to pay your loan after a month and need to rollover your loan again, for two more weeks, your total fees would climb up to $60 on top of the original $100 you also still owe.
As you can see, it is important to make sure you are able to pay your loan back a soon as possible, or you risk incurring more and more fees (or finance charges, as lenders usually call them). The fees can continue to climb up as you take longer and longer to pay them back, and eventually become a pretty serious financial burden on you and your family.
What is a Merchant Cash Advance (MCA)?
Merchant cash advances are a system of small business loans available for struggling businesses. They allow you to take out a short term loan, which will be paid back with a percentage of daily credit card earnings.
An important disclaimer, however, is that they are also known for having high-interest rates as they are technically not a lending business, so they legally do not do business loans and are instead comprised of a sale of future credit card earnings.
Business owners sometimes choose to opt for an MCA in order to maintain cash flow in their business and to help them during tough times.
Whether you’re a business owner or looking for a loan for personal reasons, it is important to be informed on what the charges you could incur as a borrower, and what your lender’s rights are when it comes to you.
In the end, it is important to have as much information as possible when considering a personal finance loan. Personal finance is a serious topic and must not be taken lightly, as it can both impact your long term financial health and your future credit scores. It is important to explore all your options before you make a decision and understand exactly what it is you are agreeing to when you take a personal finance loan.
Payday Loans Pro is a good option for people looking for some of the shortest term loans out there. It has comparatively lower interest rates than other companies, and it will not do hard credit checks that would negatively impact your credit score. If you’re in need of cash quickly and know you are able to pay it back with your next paycheck, then you should definitely consider contacting Payday Loans Pro.
Payday loans can be a useful way to cover unexpected expenses, and if you are informed and aware of the added costs of taking out such a loan, then you are ready to get a credit check and see where you stand. So get your personal finance boost today!