The High Price of “Low Cost” Payday Loans

You’re two weeks away from payday, and your car breaks down. The fix is going to cost $100. The problem is, you don’t have enough money in the bank for food, much less a $100 car repair. You need your car. You have places to go. Your kids have places to go. You need to get them there. So you do an internet search for “low cost” payday loans. You find a place that will only charge you $10 to borrow $100 for two weeks. Perfect! The loan will only cost you $10, right?

Maybe. Maybe not.

A $10 Fee on $100 is a Whole Lotta Interest!

Payday loan companies advertise low costs and fees. After all a $10 fee on $100 is only 10%, right? Well, yes, but the question you should be asking is “What is the APR?” The answer is eye opening.

To figure out the APR, or annual percentage rate, you just need to do a little math. Don’t worry. It’s not calculus.

First, you need to turn your $10 fee into a yearly amount. The fee is for a two week period. There are 52 weeks in a year. Divide 52 by 2 to get 26 two week periods. Then multiply 26 by $10, and you get a fee of $260 a year. That’s the first step.

Now to find the APR, take your annual charge and divide it by the amount of your loan. Multiply that number by 100 to get the percentage rate, and you have the APR. In our example, we take our annual charge of $260 and divide it by $100 (our loan amount) to get 2.6. We multiply that by 100 to get an APR of 260! Yes, an APR of 260 is low cost when it comes to payday loans, but in the grand scheme of life, it’s highway robbery!

Even though I hate credit cards, it would be much better to take a cash advance from a credit card at 20% APR than to get a payday loan at 260% APR! Just make sure you pay it back ASAP.

If You Don’t Have the Money Now…

We’ve talked numbers. Now let’s talk about life. If you’re two weeks away from payday, and you don’t have $100 to pay for a car repair, what makes you think you can afford $100 when your next payday rolls around?

If you have no emergency fund to handle expenses such as these, it means you’re spending every penny you make, every pay period. That’s a problem bigger than payday loans.

I realize that in this economy there are many people who are unemployed and underemployed. I believe you when you say your paycheck barely covers life’s necessities. I’ve been there.

However, if you take out a loan you can’t afford, it will catch up with you. Many borrowers of “low cost” payday loans find out the price is too high. Payday rolls around, but your paycheck is barely enough to cover the bills. The payday loan company rolls your loan for another pay period, adding on another $10 fee. The next payday rolls around, and now you owe $120, but you can’t afford it, so the loan is rolled again, making it $130. You’re stuck in a never-ending cycle.

It’s stressful. Financially, it’s unsustainable. There has to be a better way.

Avoid the High Price of “Low Cost” Payday Loans

Now that we’ve determined the true high price of so-called low cost payday loans, how about some alternatives? As much as someone living paycheck to paycheck might want to save an emergency fund, it won’t happen overnight. And there’s bound to be an emergency just when you can least afford it. So what can you do?

Sell something. It’s free to list something on Craigslist, so sell something. Furniture, clothing, electronics, anything. Sure, it’s painful, but it’s less painful than being caught in a cycle of debt you can’t repay.

Look for alternatives. In the case of our example, she could take public transportation, walk, or ride a bike to work. And I’m all for kids being involved in activities, but I’d rather give up the activities for a couple of weeks than go deeper into debt. But chances are someone on the soccer team will offer to pick up your son, if you make your needs known. So ask around.

Work. If you’re on an hourly wage, ask if you can pick up a few extra hours. If that’s not a possibility, offer your services as a babysitter, housepainter, dog walker, or anything else you can think of. Place an ad on Craigslist advertising your services.

For even more ways to make some extra money, check out PT Money’s ebook, 52 Ways to Make Extra Money.

Then plan ahead. To make sure you are never again in a position to even consider taking a payday loan, make a budget and build an emergency fund. Work on finding a steady stream of extra income, and slowly work your way out of living paycheck to paycheck.

Have you ever taken out a payday loan? How did it work out? Would you do it again?

23 thoughts on “The High Price of “Low Cost” Payday Loans”

  1. Payday loans are the biggest rip-off going. I got them good. Borrowed thousands from those idiots and stuck them good. there is nothing they can do about it

  2. While I agree that payday loans can be very expensive in terms of APR its not really a fair way to measure the cost of what is intended to be a short term loan. After all there are certain fixed costs to setting up a loan regardless if the amount is for £100 or £5000.

    Regardless if they are expensive or not if people didn’t want them then their would be no market and the companies would be out of business!

  3. I work in Payroll and I have seen the garnshments of employees from payday loan stores and the interest was 500% and more. Employees would tell me how they borrowed $100 and they would pay it back and because they were a “good customer” (I guess over time) they could borrow more and take longer to pay. One employee told me that she “borrowed” $500 and by the time I received it for garnishment, it was $2500.

    The commericals on TV makes it look very glamerous. (friend getting married in Vegas on the last minute, you go to your friendly payday loan store and borrow to travel for the wedding)

    Since the economy is now so strained, I see Payday Loan Stores popping up everywhere. Sadly, I have seen them in the more urban neighborhoods.

  4. I feel that payday loans have a niche if used for the right situation and individual. In the right situation, a credit card would be a better option, provided you don’t have an existing balances. Provided you use the payday loan to borrow against assets you will/should have, you will be fine. It’s unfortunate that the majority of America isn’t educated on personal finances.

  5. Thanks Lynnae for giving an enlightenment on “low cost pay day loans” that are not really that so. For me, emergency fund can really help us in any future financial troubles. We don’t build it overnight, we build it even at a little by little steps.

    Selling stuff is a good alternative. But the problem is, when we are in a hurry, we can’t set a nice price for what we intend to sell.

  6. Great Article!

    One question.

    “Even though I hate credit cards, it would be much better to take a cash advance from a credit card at 20% APR than to get a payday loan at 260% APR!”

    Do you really want to take a cash advance from a credit card? I think you would like to do this only if you have no balance on it and you know you can pay it off right away. Most credit card companies will place your payments against all other purchases before they do your “Cash advances”. And Cash Advances have higher interest rates usually. This way the cash advance portion is never paid off until you pay of your credit card completely. I agree…I hate CREDIT CARDS!

    • Completely agreeing with you. I should have written that making a charge on the credit card would be a better option, as a commenter above pointed out. That would definitely be better than a cash advance, for the reason you mentioned.

      Either way, I still hate credit cards. :)

  7. I have a friend that got herself in trouble using payday loans. She never seemed to be able to pay them off. Borrowing from one to pay another each week. Vicious cycle.
    I want to feel bad for her however her money issues are a constant thing. Not because her or her husband don’t make a decent income but because they spend their money foolishly and never ever save anything. Always looking for an easy fix when an issue arises that requires cash. She will never pay her family back for consistently digging her out. They are enablers.
    No reason for anyone not to save something each week if they really want to. Even the smallest amount adds up over time even if you don’t see it to begin with.
    With payday loans people only look at the “its only $10”, they never think about the big picture.

    • Your friend needs help. This is one of the reasons payday loans are so controversial. IN theory I think they make sense. High APR interest rates in exchange for high default risk. The high APR is really never realized if the loan is only for 2 weeks or a pay period. However many people fall into this cycle. I suggest avoiding payday loans like you would an ax wielding maniac.

  8. If you have a credit card wouldn’t it make more sense to find a auto shop that takes CC’s and charge it rather than take a cash advance? You would get the ‘loan’ for 0% if you paid back the 100 bucks during the grace period. Cash advance accrue interest straight away.

  9. I once worked for a week over Spring Break at a pay-day loan type place while the owner was on vacation. It was horrible – so sad. I could clearly see that the clients were lost in a vicious cycle of debt at super high interest rates, never to escape. I would NEVER work at a place like this again – not even for a week.

  10. I simply can’t imagine using one of these payday loan companies unless you have absolutely no other option…no emergency money, no friends, no family. I guess if I had to do it to feed my kids I would, but there are so many other options for me at least.

    I know lots of people live paycheck to paycheck, but c’mon I’ll bet almost everyone could afford $10 a week to put into an emergency fund. May not seem like much, but the breathing room it will give you after a few months will be nice. $200 can be a great thing to have in the bank if your only other option is a loan at 260% APR.

  11. A couple years back, when I was living in an area with a VERY high cost of living (Western Connecticut) with a very low income job (grocery cashier), I relied on payday loans to cover groceries and gas because my paycheck barely covered rent. I eventually had about 600 dollars floating between three loan companies. I would borrow from another company to pay back the first company, and, since you have to wait two weeks to borrow again, I would just borrow from that company to repay the other. What was originally a 200 dollar loan ballooned to 600 dollars over the course of about 6 months.

    I eventually dug myself out of the hole but it took about two months of eating nothing but peanut butter sandwiches and working about 60 hours a week to pay everyone off. I haven’t taken out a payday loan since and never will. My sister-in-law is currently riding the payday loan merry-go-round and seeing her stress makes me so glad that I got off.

  12. I never did a payday loan (did apply to work there once-did not see like somewhere I would want to work). I have done the title pawn loans twice awhile ago. Barely got out of it before they started repossesion proceedings and said never again!

  13. I haven’t taken out a payday loan, so can’t speak to that experience. But I have lived paycheck to paycheck, with a very low paycheck at that. I’m glad to see your suggestions on ways to avoid borrowing money in an emergency. When you’re that out of money, relying on help from others and looking for ways to earn extra money is probably the best option.

  14. I have never taken out a payday loan, and I absolutely will not. We had a major expense last October when our car’s engine threw a rod. The engine shop our mechanic told us to take it to wanted $400 just to tear the engine down to “see” if it could be fixed or not. I said no. We had our emergency fund, but it was not enough for the repair and I didn’t want to empty it. So, I called my dad. He found a licensed mechanic who agreed to fix the engine for $200 labor plus parts. He rebuilt the engine. It cost us a little more than nine hundred dollars. My dad paid the mechanic and engine shop that rebuilt the engine. I agreed to repay my dad. He said I could send whatever I could afford, so we’ve been sending him money every month, and will have it paid off very soon. This is a lot better than a payday loan.

    I’ve also seen ads for places that will lend people money in exchange for their car titles. If the money is not repaid, they can (and likely do) take the cars. No thank you, very much!

    • Not everyone can take public transit. Small towns & rural areas don’t have them; in smaller cities service is less complete and it doesn’t run at all hours.

  15. People do really use these. It’s really upsetting to see how many of these little payday loan store fronts are alive and well in bad parts of town. (like where I used to teach high school back in the day) People go to them repeatedly instead of the bank. Nooooooo! Don’t do it!

    I knew they were bad, but had never stopped to compare them to credit cards–after all, aren’t credit cards bad enough!?!?!


Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.