Do Payday Loan Charges Add Up?

As payday loan lenders charge annual percentage rates upwards of 400%, simple mathematics indicate that the charges associated with this type of loan can add up rather quickly. However, it is necessary to examine the intended use of this type of loan and how the annual percentage rate is calculated to determine the effects of the charges associated with borrowing from these companies. As annual percentage rates are prorated over the course of the year, the term of the loan is the most significant factor when analyzing the fees.

First, and foremost, payday loans are intended to be short-term loans to the meet the immediate liquid needs of the borrower. The terms of this type of loan are not intended to exceed one week, two weeks, or up to one month depending on the borrower's pay schedule. Should the borrower adhere to the short-term intention of the loan, the fees associated with the borrowed funds fall within the 15-30% range of the total amount funded by the payday lender. These percentage amounts are no more than many standard credit card interest rates on fund advances.

On the other hand, should the borrower choose to refinance the loan at term, the charges will be reassessed and added to the newly funded term. If the borrower continues this cycle of refinancing, the charges associated with the loan will add up quickly. The borrower at this point is essentially paying the charges on the loan only, and not making any payment toward the principal amount. Should the borrower continue to refinance the same loan amount for one year's time at a 400% annual percentage rate, the borrower will have paid the lender the total amount financed four times that year in associated fees only.

Simply stated, if the borrower's intention is to utilize the payday lender as a short-term solution for immediate liquidity on the next pay period's funds, the charges associated with this type of loan are not extraneous. However, if the borrower's needs are long-term, or repayment becomes difficult, the charges associated with this type of loan can and will add up quickly.