Payday loans have become the face of predatory lending in America for one reason: The average interest rate on a payday loan is 391% and can be higher than 600%!
If you can’t repay the loans – and the Consumer Financial Protection Bureau says 80% of payday loans don’t get paid back in two weeks – then the interest rate soars and the amount you owe rises, making it almost impossible to pay it off.
You may think a payday loan is the only solution for handling an emergency bill, or even pay off another debt, but the truth is, a payday loan will end up costing you more than the problem you’re trying to solve. It’ll add up to more than any late fee or bounced check fee you’re trying to avoid.
Compare payday loan interest rates of 391%-600% with the average rate for alternative choices like credit cards (15%-30%); debt management programs (8%-10%); personal loans (14%-35%) and online lending (10%-35%).
Some states have cracked down on high interest rates – to some extent. Payday loans are banned in 12 states, and 18 states cap interest at 36% on a $300 loan. For $500 loans, 45 states and Washington D.C. have caps, but some are pretty high. The median is 38.5%. But some states don’t have caps at all. In Texas, interest can go as high as 662% on $300 borrowed. What does that mean in real numbers? It means that if it you pay it back in two weeks, it will cost $370. If it takes five months, it will cost $1,001.
By the way, five months is the average amount of time it takes to pay back a $300 payday loan, according to the Pew Charitable Trusts.
Payday Loan Changes Retracted
The Consumer Financial Protection Bureau introduced a series of regulation changes in 2017 to help protect borrowers, including forcing payday lenders – what the bureau calls “small dollar lenders” – to determine if the borrower could afford to take on a loan with a 391% interest rate, called the Mandatory Underwriting Rule.
But the Trump administration rejected the argument that consumers needed protection, and the CPFB revoked the underwriting rule in 2020. Continue reading