Payday Loan Rates – A Breakdown by Numbers
Although payday loans may seem to be a manageable method for quick cash, their design has so many pitfalls that pursuing them is financially unwise.
Just the same, millions of Americans apply for and receive payday loans each year. These same Americans are often some of our nation’s most financially vulnerable.
So, how dangerous are the fees and penalties attached to payday loans? What makes them so unwieldy? Let’s look at payday loan rates across the country to create a clearer picture of their economic effects.
Current Legal Status of Payday Loans in the U.S.
Payday loans may seem the only answer to a financial problem, but consumers in different states can face very different rules and penalties. Understanding the state laws and regulations in which a payday loan is being applied for is critical. Poorly managing the repayment process can cost a consumer more than the original loan amount.
As it currently stands, most states have specific rules for payday loans and lenders. Some have extensive consumer protection, while others are relatively unregulated. Consumers in the latter states should consider the issues they may face for failing to meet the repayment criteria.
Many states will limit the loan amount to $500 to safeguard consumers. Unfortunately, the interest and penalties accrued for not fully repaying the loan amount can vary from state to state.
Because of past issues with payday loan companies, several states are working on reforming their laws, rules, and regulations regarding this industry’s practices. Starting around 2010, Colorado, Ohio, Virginia, and Hawaii have worked to pass comprehensive reform measures and consumer protections against payday lenders.
There are currently 18 states which don’t allow payday lending or have set limits on how much can be lent or the interest on repayments. These limits effectively keep payday lenders from being too predatory. The 18 are Vermont, New Hampshire, New York, Massachusetts, Pennsylvania, New Jersey, Connecticut, Maryland, North Carolina, Georgia, Arkansas, New Mexico, Arizona, Nebraska, South Dakota, Montana, and Washington, DC.
That leaves 32 other states where payday lenders can operate with little regulation. Out of these, only Oklahoma, Colorado, Ohio, Virginia, and Hawaii have limited protection in place.
Typical Payday Loan Interest Rates in the U.S.
Most payday loans are structured, so the consumer doesn’t realize how much they pay in interest or the APR (annual percentage rate). For instance, many states will cap the fees between $10 and $30 per $100 borrowed.
If a consumer is paying $15 on a $100 loan granted for two weeks, they’re spending an APR of nearly 400%! Comparatively, a credit card will typically have an APR between 15% and 30%, which is much more reasonable.
Some states which don’t have any protection in place can see interest rates upwards of 600%. These rates almost guarantee that most consumers will have problems paying back loans with such exorbitant fees.
Why Are Payday Loan Rates So High?
Payday lenders are not usually the first choice for consumers looking for a loan; they recognize this. They thrive somewhat because of this perception.
Suppose a consumer has good credit and steady financials. In that case, they’re more likely to be able to ask their bank or a reputable lending institution for a loan with reasonable rates and repayment terms. The lenders recognize that there’s a good chance the consumer will pay back the loan on time and in full.
There are less reputable institutions or banks offering loans for customers with poor credit or an unstable financial situation. These institutions are less likely to want to take a chance on a consumer who may default.
In step, the payday loan companies understand they may be taking a risk by lending to a consumer whose financial future is in doubt. Because of the perceived threat, they cover themselves financially by attaching such stiff penalties and fees. One part is a deterrent to missing a payment, and another is that the added revenue stream equals a raw deal for many consumers.
Payday loan companies can offer such high loan rates and fees because they know they are many consumers’ last option. They can set high speeds and expenses by occupying a position of dire necessity.
Payday Loan Rates Per U.S. State
Each state has its rates and APR for payday lenders, as shown below. Some states are in the process of reforming, but many are continuing to operate in a buyer-beware atmosphere.
For the states which allow payday lenders:
State Average APR
North Dakota- 354%
Rhode Island- 261%
The Actual Cost of a Payday Loan
The real danger of payday loans is the massive fees and interest rates which aren’t fully understood or explained to consumers. Fortunately, there have been more crackdowns on payday lenders following illegal or unethical practices. However, there is still much work and education to spread to consumers regarding these loan companies.
Many companies continue to operate under the radar or scrutiny of consumer watchdogs or governmental agencies. By staying out of the spotlight, they can still offer customers loans which will more than likely put the consumer in a worse financial situation than when they started.
If the loan isn’t repaid on time or the total amount isn’t paid back, an avalanche of problems can rain down on the consumer, starting with added fees and compounding interest rates or APRs. These fees put the consumer in a deeper financial hole in which their payments won’t even touch the principal amount.
When consumers default on a loan, their credit scores will also fall. This limits the consumer’s buying and lending power. For a consumer already in financial straits, further problems only worsen matters.
Once the consumer’s credit is undermined, they’ll most likely be unable to apply for or receive loans from banks or lending institutions as a method for paying back the ever-growing payday loan amount. The cycle of payday loan repayment now has the consumer trapped.
Does It Make Financial Sense to Opt for Payday Loans?
The short answer is no. In most cases, the interest rates, fees, and penalties are more of a deterrent than the perceived benefits of such a loan.
That being said, if a person needs quick cash and knows they’ll be able to meet the payoff deadline, a payday loan may work. It comes down to which state the loan is being processed and what consumer protections are in place. The payday loan may be a good fit if the rules and regulations are reasonable.
For the most part, though, many other options can assist a struggling consumer, both short and long-term. Credit cards, bank or credit union loans, or even a lending institution may offer better rates and rules than most payday lenders.
How to Protect Yourself From Extremely High-Interest Rates?
If you’re living in a state which lacks decent protection against interest rates and fees associated with payday loans, it’s best to look for other lending options whenever possible.
Some protections exist for individuals or families in the military, regardless of the state in which the consumer resides. The Military Lending Act, for instance, was put in place as a protection for service members and their families regarding most consumer loans. Part of the act mandates that the interest rate be capped at 36% and that there are no penalties for early repayment.
Additionally, payday loan companies can’t make a servicemember submit to mandatory arbitration or create a voluntary military allotment from a paycheck to receive the loan.
When considering non-military members, the protections tend to fall unless a consumer takes out a loan in a consumer-friendly state. If a consumer has found themselves trapped in a payday loan, they still have options.
One of the best ways to manage overdue payday loans is to set up a loan consolidation plan. Working with a third-party consolidation specialist, like Real PDL Help, allows consumers to see options for alleviating their impending debt.
Many consumers fear that once locked into a payday loan scheme. They’ll never be able to escape. In truth, payday loans can ruin a person’s life if not addressed properly. By seeking assistance with managing debt and declining credit scores, though, there is a path to financial freedom.
Contact Real PDL Help today to see how other consumers could turn their lives around and find relief from out-of-control payday loan rates.