August 28, 2009, Newsletter Issue #72: Understanding Loan Interest

Tip of the Week

One of the mysteries about payday loans is their interest. Because interest is not stated specifically, the ordinary consumer doesn’t know just how much interest they are paying. If they did, they might think twice about using payday loans. Interest is veiled in set fees per $100.

Payday loans can be advantageous if you pay them off during their initial term. They can help you cover an unexpected loss, pay off bills or provide money for emergency. On the flip side, rolling over the term by paying fee after fee for extensions means that you’re really just paying more interest on the same amount. Here’s an example.

Let’s say you borrow $100 and the fee is $15. If you’re not the most responsible person and decide that you need to roll over that loan payment five more times before you can pay it off, you’ll end up paying $75 in fees to borrow $100. That equates to an effective APR of 780 percent! But if you repay the $100 within a week, you won’t pay additional fees and you certainly won’t face so much interest. It’s important to weigh the potentially high interest rates against your reasons for wanting/needing a payday loan.

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