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How Payday Loan Interest Rates Are Considered

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Allison Bieghler
How Payday Loan Interest Rates Are Considered

It is critical to have a plan when you come into hard times. Everyone would love to have plenty of cash available for emergencies. But reality can be harsh, and most people have less than 3 months of spendable cash. Many have even less and live from paycheck to paycheck. This is where payday loans come into play. You can keep creditors like utilities off your back by lending you money for a short time for an emergency.

Many ask, “what are the interest rates” for payday loans. This is because credit companies and banks focus on interest rates. This is fine when you are getting a loan for a long period, as with home and auto purchases. It’s important to understand how interest rates work for longer-term borrowing. The interest rates may be high for short-term payday loans but are irrelevant.

The cost of a loan centers on two things: APR and the loan’s length. In the case of a payday loan, the two factors are fees and the length of the loan. For example, a $500 balance with a high 1,500% APR will accrue $500 interest over three months. However, the amount drops to $130 if the loan length is reduced to a month without lowering the APR. Payday loan lenders disclose the exact fee you are charged for your loan and the due date. APR is not a factor since the loans are for one month or less in most cases.

No, you cannot because certain states have banned payday loans as they do not feel it is best for the public. New York is an example of this. But they allow a utility to shut you off, charge you penalties, interest, exorbitant restart fees, etc.

In most of the U.S., the government and the states have worked to regulate the industry and keep interest rates reasonable. An example is the District of Columbia, whose interest rate is capped at 24%. This is the same as loans from banks and credit unions.

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Allison Bieghler
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