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How Much Interest Will You Need to Pay on a Payday Loan?

February 26, 2012 | Comments: 0 | Views: 161

As with any form of borrowing, the rate of interest applied to a payday loan will often differ from one lender to the next. This makes it difficult to provide an accurate estimate, however most are around 25% per month or 1% per day.

The key to finding out which company offers the best value is to compare the relative rates of a number of different lenders. Remember though that interest is only one part of the overall cost of a loan, potentially at least. Some will add on other fees, albeit only a few pounds in most cases, which can bump up the cost of borrowing. This is why you need to be able to accurately gauge what the final cost will be.

To get a decent idea of the charges you're likely to incur, read through the terms of lending on the payday loan company's website or literature. As well as giving you the base interest rate, it should clearly indicate any charges that you are likely to encounter. Some will even provide a slider that will allow you to choose your loan amount, perhaps even how long you are looking to borrow for, and then automatically calculate the estimated cost of borrowing.

Regardless of whether this kind of facility is available, you should still be able to calculate the total loan amount through the information provided. For instance, as well as advertising the APR, which can be a little misleading, most brokers and lenders will also provide the cost for every £100 borrowed. As these rates are generally standardised, remaining the same regardless of how much you borrow, it's usually pretty easy to work out the cost.

So let's say you want £300 and the payday loan company you stumble across is advertising a flat rate fee of £25 for every £100 borrowed. This means that the total cost is going to be £75 and you'll have to stump up £375 within a month; however, this also assumes that there are no other charges. So take a look through the website and see if additional fees are mentioned, if they are, add these into the equation.

This will give you the basis for comparison that you need in order to weigh up the relative merits of individual lenders. Looking at APR alone could lead to unfortunate confusion, particularly as this takes into account the yearly cost of lending, which is somewhat irrelevant for short-term loans like these. To be charged the full rate of interest, you would have to miss 12 consecutive monthly payments, at which point the constant multiplications would amount to a rate of over 1,000%.

Don't take this warning lightly though. If you know that you're going to struggle to repay the payday loan, the best advice would be to leave well alone. Whilst you might be able to get out of a tight squeeze temporarily, failing to have the funds on the automatically assigned date (usually your next payday) will have major financial implications.

Defaulting on a payday loan will generally result in an extra month's interest being applied as well as other extra charges for the added administration costs. Essentially, the £300 loan we discussed earlier would possibly end up costing nearer £200 once the interest and fees for two months are taken into account. Suddenly it can become very expensive indeed.

So generally speaking, the rates on payday loans are slightly more than the annual interest on credit cards and personal loans, but not by as much as many would initially think. The true cost is often 20% or even 25%, but you will need to review individual lenders to find out their respective rates.

Vincent Rogers is a freelance writer who writes for a number of finance businesses. For Payday Loans, he recommends Payday Power Loans.

Source: EzineArticles
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