Are Payday Loans Expensive?

By Carol / Published on Friday, 23 Dec 2016 08:49 AM

If you compare the cost of a payday loan with that of a regular bank loan, it seems like an easy question to answer.

It must be kept in mind though that the two are very different and as such, their cost is different as well.

A bank loan is a long-term loan, often for a large amount of money. Interest is calculated based on the fact that the bank will be without the money for a long time, so they use an APR (Annual Percentage Rate) to calculate how much you must pay on top of the money that you borrow.

As the economy changes, those rates may go up or down and your paid interest also.

Payday Loans Are Short Term
A payday loan is most commonly for a 30-day period. The idea is to have some quick cash for unforeseen expenses until your next paycheck comes in. At that moment, you pay back the loan plus the fixed rate and you’re once again free of debt.

This is important to remember: payday loans carry a fixed rate which you will pay only once. Unless of course you need to extend the loan for another 30 days, in which case you will have to pay the fixed rate twice: first after the initial 30 days are over and after that, when you do finally pay off the loan.

And this is where payday loans can become expensive. If you take out a loan so high that you can’t pay it back in full when your salary arrives, you have to pay the fixed rate every time the term is up. That can quickly become very expensive, and it’s not how payday loans are meant to be used.

Every Loan is Expensive
Unless you borrow money from a friend or a relative without any interest, you will always have to pay more than you borrow. This is how lending works. What is important to realise is that interest rates always fluctuate, and recent years have seen a steady rise.

Interest rates are nowadays almost double of what they were four years ago. It stands to reason that this would then also apply to short term micro loans. And in some cases, rates are more than double.

A recent analysis by Money Supermarket, a website that compares prices on consumer products, showed that the average rate for a £3,000 personal loan was 6.49%, whereas today it is 14.92%. This increase of 130% means that customers are paying back more than double the interest they used to. Cheap loans are definitely a thing of the past therefore, regardless of whether it is a bank loan or a payday loan. Payday loans do however offer an immediate solution.