When you are stuck in a jam, the thoughts of a payday loan may be appealing but first think about the amount of interest that you will be paying back and if this will be a one-time thing. It is very easy to get stuck in a vicious cycle of returning to the payday loan company week after week and paying back hundreds more than originally borrowed. The annual percentage rate on payday loans is astronomical but many people do not realize this because it is usually borrow on a week or two-week payback period.
The short-term payday loans can often have annual percentage rates that top 700%. At the annual percentage rate of 700%, the daily percentage rate is 1.92%. What this means for every $100 that is borrow on a payday loan you will be paying back $1.92 in interest. I know you are saying to yourself that $1.92 per day does not sound that bad but take a look at these examples; they may change your mind.
You borrow $500 for a 7-day period in Noth Carolina. Now the $1.92 per day becomes $9.60 per day. $9.60 times the 7 days is $67.20 in interest to borrow $500. Now if you only are paid every 2 weeks and need that same $500 for 14 days that $1.92 a day is still $9.60 but times that $9.60 times the 14 days and you are paying back a whooping $134.40. It will cost you $134.40 to borrow your own money for a 2-week period. That payday loan doesn’t sound so appealing anymore does it?
Compare the interest rates on your credit card with those of the payday loans and the look is much more reasonable. You have 30 days to pay back the money and the fees and interest amount is much more manageable. Even though you have 30 days, you can pay back the amount early. Therefore, we will use 7 and 14 days so you can see an accurate comparison. The following is an example of a cash advance for a typical credit card.
You borrow $500 as a cash advance on your credit card. Most charge a 3% fee so there is $15.00. Now your annual percentage rate on the credit card for a cash advance is usually around 21% to 24%. Therefore, we will go with 24%. At an annual percentage rate of 24%, you get a daily interest rate of .07%. At .07%, you will pay $.07 per $100. For a $500 cash advance, you would be paying $.35 per day. That $.35 per day for 7 days is $2.45. It would cost you $17.45 to borrow $500 as a cash advance on your credit card for 7 days. That same $500 for 14 days as a cash advance would still have the same 3% or $15 cash advance fee. It would still be $.35 a day for interest. That $.35 time 14 days is $4.90. To borrow $500 as a cash advance for 14 days would cost you $19.90.
That payday loan does not make much sense anymore does it?