APR and EAR compared to Understand True Payday Loan Price

by Guest

This is a sponsored guest post.  Use judgment and caution when taking out any type of loan.

We hear so much about the high price of payday loan financing. It is the preferred means of borrowing when you have a poor credit score and no functioning credit card.

But is it possible that a cash advance paycheck service (another name for a payday loan) is a good deal? It depends on what you compare it to. And knowing the actual cost of things, loans and credit card balances in particular, can be pretty confusing.

Start with the interest rates charged. There has been a lot of misreporting on payday loan costs because quite typically the EAR, effective annual rate, is what we hear about. On a $100 payday loan, the compound of a $15/two week loan is 26 x $15, which comes to a $390 finance charge on that $100 loan, an EAR of 3,685%. Not at all a good deal. But no one in his or her right mind would hold onto a loan that costs so much. Instead, that $15 charge calculated as an APR (annual percentage rate) would be 390 percent. In fact, you are paying only 15% on the loan (note most come with a transaction fee in addition to the interest rate). It is much more reasonable than the EAR figure that is bandied about.

For a sample of what payday loan charges can be, visit http://www.cashnetusa.com/. This is a good player in the industry, offering reasonable rates and payback plans.

Now, compare these interest charges to the sky-high rates charged by credit card companies. These can be 29% on revolving charges, which many borrowers have a hard time eliminating over months and even years. The interest charges can effectively be in the stratosphere. With poor credit, most other forms of borrowing is unavailable to borrowers.

Bottom line: Know the real numbers and investigate your options. Then pay back the loan in as quick a period of time as possible.

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1955nurse February 3, 2012 at 12:58 pm

They closed down ALL the “Payday Loan” places here in our state, the Attorney General compared them to Loan-sharking! But you’re right – if you compare the rates & pay it off in a timely fashion it’s not bad… only problem is, most people who are going to them are people who have no idea what you’re talking about – and don’t know an WhAT an APR rate is, or how they got in that shape in the 1st place so it just compounds their problem!!! I worked w/people who would go get a Payday loan & go to the Casino, them lose all THAT $$ & then have to pay back the payday loan when they got paid – their kids & family really suffered!

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