Payday loans often carry interest charges 20 times greater than the average credit card, but it hasn’t stopped Americans from using them. And depending on the state, some will charge you more interest than others.
The national average annual percentage rate is almost 400%, according to a study by CreditCards.com. This compares to July’s 16.95% figure for the average credit card APR.
Fortunately for consumers, states aren’t clueless about the quickly expanding costs associated with payday loans. According to the Center for Responsible Lending, the District of Columbia and 15 states have laws limiting APRs to 36% or less while the remaining 35 states allow for higher rates.
For Ohio, change is coming as a new law was recently signed by Ohio’s governor, capping payday loans’ APRs at 60%. This will go into effect in October.
While this figure may seem high, it’s nothing compared to Ohio’s current average interest rate at 667% – the highest in the nation – followed by Texas (662%), Utah (658%), Nevada (652%), Idaho (652%) and Virginia (601%).
It can get worse. Unfortunately, the interest can add up quickly if the borrower rolls the loan over multiple times, leading to a costly payday loan cycle. For consumers behind on loan payments, costs will grow and become long-term.
Payday lenders aren’t sympathetic; they will become aggressive to get their money back including taking it straight from a borrower’s checking account (access given by consumers as a loan condition). With these withdrawals, borrowers can incur expensive overdraft fees and potentially damage credit scores.
Some people may say it’s the cost of doing business.
“It’s normal to get caught in a payday loan because that’s the only way the business model works. A lender isn’t profitable until the customer has renewed or re-borrowed the loan somewhere between four and eight times,” said Nick Bourke, director of consumer finance at Pew Charitable Trusts, via CNBC Make It.
This doesn’t stop consumers from getting payday loans. To obtain one, a consumer needs a bank account, proof of income, and a valid I.D. The loan’s balance, along with interest and service fees, is usually due on the next payday—typically two weeks later.
With high APRs nationwide, many consumers have the best intention to pay back the loan sooner than later, but at the end of the day, it can be challenging. However, before resorting to payday loans, consumers might be better off exploring their options – some may find they qualify for personal loans for bad credit or installment loans. These loans might still carry relatively high interest rates – but can still be much lower than payday loans.
Author: Debbie Baratz
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