Payday Loans Today!

Being a short term loan industry ‘insider’, I am often asked how I can justify the seemingly high APR’s for payday loans and cash advance loans. With APR’s reaching almost 2000% it does seem that perhaps there is an aspect of loan sharking going on in the industry. It is easy to understand the concern about the rates as at first look they do appear to be incredibly high. After all, most banks won’t charge over 20% APR on regular loans and that is only in extreme cases.

In response there is a very simple reason that payday loan lenders can get away with the high APR’s. The fact that by law the rates must show APR (Annual Percentage Rate) for a loan that is designed to be repaid in two weeks in most cases is very misleading to the consumer. APR describes the rate of charge for a whole year and expresses interest and other fees as an annual rate.  If you annualize any product that you only use short term you will see where the discrepancies come into play.  For example a  simple movie rental  at a cost of $3.95 for 3 days  can be  annualized at an APR of 18250%!

This is where the misunderstanding about payday loan apr comes in to focus. If you annualize something that has a two week term, of course the APR is going to be high. In reality, a loan that has a two week payback and charges twenty-five dollars for a one hundred dollar loan (which is an average amount) your actual percentage is only twenty five percent! Sure, it is higher than some conventional alternatives but many people taking out a payday loan have issues with credit or other problems in their background that prevent them from using conventional channels of finance. This leaves the payday loan company assuming a much higher degree of risk than the more conventional  financing options and justifies the higher interest rate to match the risk taken by the lender.

I also hear a lot of people claiming that the payday loan industry takes advantage of the poor. This is an argument that makes no sense and those making the claim are ill informed or just repeating a mantra they have heard elsewhere. In fact, the average payday loan customer earns an average of thirty six thousand dollars per year or more  and is a white collar worker.  These people are far from being poor. At worst they are likely to have had money management issues in the past that cause them to avail the services of a payday loan company. It is not the loan company that has put them in their economic situation but the industry is often blamed when the customer decides not to re pay the loan.