Payday loans are short-term loans designed to provide borrowers with quick access to cash. They are typically used to cover unexpected expenses and are due when the borrower receives their next paycheck. The Annual Percentage Rate (APR) is the cost of credit expressed as a yearly rate, and it is used to compare different types of loans. In this article, we will explore the history of payday loans, the average APR of payday loans, the factors that influence APR, and alternatives to payday loans.
What is a Payday Loan?
A payday loan is a type of short-term loan generally used to cover unexpected expenses. These loans are usually due on the borrower’s next paycheck and typically range from $100 to $1000. Payday loans are provided by lenders, such as banks, credit unions, and online lenders. In some states, payday loans are illegal due to the high interest rates associated with them.
Overview of APR
The Annual Percentage Rate (APR) is the cost of credit expressed as a yearly rate. The APR is used to compare different types of loans and is a helpful tool for consumers to compare loan offers. It takes into account not only the interest rate, but also other costs associated with the loan, such as origination, processing, and closing fees. The APR is always higher than the interest rate because it factors in these additional costs.
Origins of Payday Loans
Payday loans have been around since the early 1900s, with the first payday loan companies emerging in the 1920s. These early payday loan companies provided short-term loans to customers in need of emergency cash. The loans were typically due on the borrower’s next paycheck and were backed by the borrower’s paycheck or other collateral.
Growth of Payday Loan Industry
The payday loan industry has grown significantly in recent years. In the United States, there are now more than 10,000 payday loan companies, providing loans to millions of borrowers each year. These companies typically offer quick access to cash and have relatively few requirements for approval.
Average APR Range
The average APR for payday loans varies by lender, but it can range from 300% to 700%. This range is significantly higher than the average APR for other types of loans, such as mortgages, student loans, and credit cards.
Average APR by State
The average APR of payday loans also varies by state. In some states, such as California, the average APR of payday loans is lower than in other states. In other states, such as Florida, the average APR is much higher.
Length of Loan
The length of the loan is one of the most important factors that influences the APR. The longer the loan, the higher the APR. This is because lenders are taking on more risk when they provide a loan for a longer period of time.
Amount of Loan
The amount of the loan is another important factor that influences the APR. Generally, the higher the loan amount, the higher the APR. This is because lenders are taking on more risk when they provide a loan for a larger amount.
Credit History
The borrower’s credit history is also an important factor that influences the APR. If the borrower has a good credit history, the lender may offer a lower APR. On the other hand, if the borrower has a poor credit history, the lender may offer a higher APR.
Mortgage APR
The average APR for a mortgage is typically between 3% and 5%. This is significantly lower than the average APR for a payday loan.
Student Loan APR
The average APR for a student loan is typically between 6% and 8%. This is also lower than the average APR for a payday loan.
Credit Card APR
The average APR for a credit card is typically between 12% and 18%. This is slightly lower than the average APR for a payday loan.
Auto Loan APR
The average APR for an auto loan is typically between 3% and 6%. This is much lower than the average APR for a payday loan.
Pros
The main advantage of payday loans is that they provide quick access to cash. This can be useful for borrowers in need of emergency funds. Additionally, payday loans are relatively easy to obtain and do not require a perfect credit history.
Cons
The main disadvantage of payday loans is the high APR. This can make it difficult for borrowers to pay off their loans, leading to additional fees and interest charges. Additionally, payday loans can be difficult to obtain in some states due to regulations.
Short-Term Loans
Short-term loans are similar to payday loans, but they typically have lower interest rates and longer repayment periods. These loans are provided by banks, credit unions, online lenders, and other financial institutions.
Credit Unions
Credit unions are non-profit financial institutions that offer a variety of loans and other financial services. They typically offer lower interest rates than traditional banks and may offer special loan programs for members.
Online Lenders
Online lenders are another option for borrowers in need of quick cash. These lenders typically offer fast approval and competitive interest rates. However, it is important to research any online lender before taking out a loan.
Borrowing from Friends and Family
Borrowing from friends and family is another option for borrowers in need of quick cash. This can be a great alternative to payday loans, as it does not involve interest or other fees. However, it is important to ensure that the borrowed funds are paid back in a timely manner.
In conclusion, payday loans can be a convenient source of quick cash, but they typically come with high interest rates. It is important to consider all of your options before taking out a payday loan and to compare different loan offers. Alternatives to payday loans, such as short-term loans, credit unions, online lenders, and borrowing from friends and family, can be a better option for some borrowers.
Bauer, K. (2020, April 22). What is a payday loan and are they legal? Investopedia. https://www.investopedia.com/articles/personal-finance/062515/what-payday-loan-are-they-legal.asp
Hancock, J. (2020, November 24). Payday loans: What you need to know. NerdWallet. https://www.nerdwallet.com/blog/loans/payday-loans/
Klein, B. (2020, October 6). Alternatives to payday loans. Investopedia. https://www.investopedia.com/articles/personal-finance/090215/alternatives-payday-loans.asp
McCarthy, J. (2019, August 6). What is APR? Investopedia. https://www.investopedia.com/terms/a/apr.asp
Popular questions
Can payday loan affect mortgage application?
Do Payday Loans Affect Mortgage Application? Yes. Many lenders will not loan to anyone with a payday loan, even if paid on time and in full. Payday loans are a major red flag if you have more than one over a few months.
What can stop you from getting approved for a mortgage?
These 9 Things May Keep You From Getting a Mortgage
- Your credit score. …
- Black marks on your credit report. …
- Your income. …
- Excessive debt. …
- Your employment history. …
- New debts after you apply. …
- A too-small down payment. …
- A lack of documentation.
How long does payday loan stay on credit report?
seven years
Can you have debt and still get a mortgage?
Yes, it is absolutely possible to buy a house with credit card debt. And by lowering your debt-to-income ratio before you apply for a loan, you may qualify for a better interest rate, too.
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