Many people are in need of fast cash for big-ticket purchases or to bridge the gap between paychecks. This is where different payment methods such as personal loans or credit cards can come in handy. Most of these payment methods typically provide you with money up front that you then pay back in addition to a certain amount of interest.
Interest rates are usually set based on factors such as your credit history. The lower the interest, the less money you end up having to pay back overall. But which payment method typically charges the highest interest rates? The answer to this question is usually payday loans. We’ll go over what payday loans are and how their interest rates compare to other common payment methods.
What Are Payday Loans?
Payday loans are usually a way for people to get some fast cash when they don’t have a good enough credit history to qualify for a credit card or a bank loan A payday lender will issue you a loan to be paid back within a short period of time (usually two weeks). Payday loans are popular because of how quickly you can get one compared to other payment methods that require lengthier applications.
Payday loans are also popular because of the few requirements you need to get a payday loan. All you truly need is a bank account and some form of income, as the lender doesn’t check your credit or even try to determine whether or not you’ll be able to pay the loan back. While the amount of money you receive varies, you can usually end up walking away with the cash right then and there.
How Do Their Interest Rates Compare?
While payday loans may offer fast cash to people with no other options, their outrageous interest rates make them hardly worth the cost. Most payday loans charge interest of about $15-$20 for every $100 you borrow, which works out to around 391% APR (annual percentage rate).
While paying $15 for $100 may not seem that expensive, looking at the interest rate via the APR percentage shows just how high the fees really are. Most credit cards have an average interest rate of 15-30%, while personal loans usually range between 14-35% depending on your credit score. Even people with terrible credit who qualify for the highest interest rates for one of these methods will still be charged less interest than a payday loan.
Payday Loans = High Interest
If you don’t pay your payday loan back within your two-week period (and most people cannot), you will have to “roll over” the loan and your interest rate will be compounded. The longer you wait to repay a payday loan, the higher your interest will get. With the incredibly high interest rates and potential for “rolling over”, payday loans should be avoided at all costs. It pays to be educated about all of your options and their interest rates before borrowing money.