Payday loans have become the face of bad loans in the United States for a reason: the average interest rate with an average payday advance is 391% that is if you pay back in two weeks!
If it is not possible to repay the loans and the Office of Consumer Protection reports that 80% of the advance payday loans are not refunded in two weeks, the interest rate rises to 521% and continues to 'increase debts.
Compare it with the average interest rate for alternative options, such as credit cards (15% to 30%); debt management programs (8% to 10%); personal loans (14% -35%) and online loans (10% -35%).
Payday loans are a quick fix for consumers in a financial crisis, but they are expenses that destroy the budget of families and individuals. Here is how a payday loan works.
If a consumer cannot repay the loan in two weeks, he can ask the lender to "renew" the loan, and an already high loan price will continue to rise. In a "reinvested" loan, customers have to pay the original loan amount and finance charge, plus an additional finance charge for the new total.
For example, the average payday loan is $ 375. Using the lowest available financial rate ($ 15 for every $ 100 borrowed), the customer owes a monetary price of $ 56.25 for a total amount, starting from $ 431.25.
If I choose to "transfer" the loan daily, the new amount will be $ 495.94. This is the loan amount of $ 431.25, plus the financial burden of $ 64.69 = $ 495.94.
Here's how a $ 375 loan becomes almost $ 500 a month.
The average salary is 375 USD. The average interest rate or "finance charge," as creditors point out with the payment, for a loan of $ 375 would be between $ 56.25 and $ 75, depending on the terms you agree to.
This interest/loan rate usually varies between 15% and 20%, depending on the lender, but may be higher. State laws govern the maximum interest that a creditor can charge with the payment.
The amount of interest paid is calculated by multiplying the amount borrowed by the interest rate. From a mathematical point of view, it is a 15% loan: 375 x 0.15 = 56.25. If you accept conditions of $ 20 for every $ 100 you borrow (20%), it would look like this: 375 x 0.20 = 75.
That means you have to pay $ 56.25 to borrow $ 375. This is an interest rate of 391%. If you pay $ 20 for every $ 100 you borrow, you pay finance charges of $ 75 and an interest rate of 521%.
The annual percentage interest rate (APR) for payday loans is calculated by dividing the value of the interest paid on the loan amount, multiplying it by 365, divide this number during the repayment period, and multiply by 100.
In mathematical terms, the APR calculations for a loan of $ 375 are as follows: 56.25 ÷ 375 = 0.15 x 365 = 54.75 ÷ 14 = 3.91 x 100 = 391%.
For $ 20 for every $ 100 borrowed (or 20%) for a $ 375 loan, it looks like this: 75 ÷ 375 = 0.2 x 365 = 73 ÷ 14 = 5.21 x 100 = 521%.
Again, these TAEs are astronomical superior to any other loan offered. If you use a credit card, even with the highest credit card rate available, you pay less than a tenth of the interest rate you can pay for a loan per day.
Research suggests that between 10 and 12 million US consumers receive daily loans each year, despite warnings from various sources about the high cost of this system.
There are other ways to find debt relief without resorting to payday loans. Community organizations, churches, and private charities are the most accessible places to demonstrate. If the Bureau of Consumer Protection gets what it wants, the federal government will impose rules that severely limit borrowing with the public payment and the cost of obtaining a loan.
The CFPB says it is working to break the trap of payment debt, the "renewable" loan cycle that requires consumers to pay $ 529 in commissions over five months over five months. With an average loan of $ 375, the CFPB proposed several changes in the summer of 2016, in particular, that payday lenders should determine if customers can make loan payments and cover necessary living expenses.
The PCPB proposals have not yet been implemented. In the meantime, what can you answer in the event of a financial crisis?