(Payday Loans) can trap consumers with interest rates, hidden fees.

My state, California, has capped the amount to loan and the maximum amount to charge is 15 %

Under California law, the maximum amount a consumer can borrow in a payday loan is $300. The maximum fee a payday lender can charge is 15% of the amount of the check (up to a maximum of $45).

Payday loans have become the face of predatory lending and high-risk loans 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%). Should payday loans even be considered an option?

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.

So before you grab at that quick, very expensive money, understand what payday loans entail.

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.

Other safeguards relating to how loans are paid back remain, including:

----A lender can’t take the borrower’s car title as collateral for a loan, unlike title loans.

----A lender can’t make a loan to a consumer who already has a short-term loan.

----The lender is restricted to extending loans to borrowers who have paid at least one-third of the principal owed on each extension.

----Lenders are required to disclose the Principal Payoff Option to all borrowers.

----Lenders can’t repeatedly try to withdraw money from the borrower’s bank account if the money isn’t there.

Congress and states are also working on strengthening protections, including a move to bring the 36% interest cap to all states. In 2021 alone, Illinois, Indiana, Minnesota, Tennessee and Virginia all clamped down on payday loan interest rates.

How Do Payday Loans Work?

Payday loans are a quick-fix solution for consumers in a financial crisis, but also are budget busting expenses for families and individuals.

Here is how a payday loan works:

Consumers fill out a registration form at a payday lending office or online. Identification, a recent pay stub and bank account number are the only documents needed.

Loan amounts vary from $50 to $1,000, depending on the law in your state. If approved, you receive cash on the spot, or it’s deposited in your bank account within one or two days.

Full payment is due on the borrower’s next payday, which typically is two weeks.

Borrowers either post-date a personal check to coincide with their next paycheck or allow the lender to automatically withdraw the money from their account.

Payday lenders usually charge interest of $15-$20 for every $100 borrowed. Calculated on an annual percentage rate basis (APR) – the same as is used for credit cards, mortgages, auto loans, etc. – that APR ranges from 391% to more than 521% for payday loans.

What Happens If You Can’t Repay Payday Loans?

If a consumer can’t repay the loan by the two-week deadline, they can ask the lender to “roll over” the loan. If the borrower’s state allows it, the borrower just pays whatever fees are due, and the loan is extended. But the interest grows, as do finance charges.

For example, the average payday loan is $375. Using the lowest finance charge available ($15 per $100 borrowed), the customer owes a finance charge of $56.25 for a total loan amount of $431.25.

If they chose to “roll over” the payday loan, the new amount would be $495.94. That is the amount borrowed $431.25, plus finance charge of $64.69 = $495.94.

That is how a $375 loan becomes nearly $500 in one month.

How Payday Loan Finance Charges Are Calculated

The average payday loan in 2021 was $375. The average interest – or “finance charge” as payday lenders refer to it – for a $375 loan would be between $56.25 and $75, depending on the terms.

That interest/finance charge typically is somewhere between 15% and 20%, depending on the lender, but could be higher. State laws regulate the maximum interest a payday lender may charge.

The amount of interest paid is calculated by multiplying the amount borrowed by the interest charge.

From a mathematical standpoint, it looks like this for a 15% loan: 375 x .15 = 56.25. If you accepted terms of $20 per $100 borrowed (20%), it would look like this: 375 x .20 = 75.

That means you must pay $56.25 to borrow $375. That is an interest rate of 391% APR. If you pay $20 per $100 borrowed, you pay a finance charge of $75 and an interest rate of 521% APR.

The annual percentage interest rate (APR) for payday loans is calculated by dividing the amount of interest paid by the amount borrowed; multiplying that by 365; divide that number by the length of repayment term; and multiply by 100.

In mathematical terms, the APR calculations on a $375 loan look like this:

56.25 ÷ 375 = .15 x 365 = 54.75 ÷ 14 = 3.91 x 100 = 391%.

For the $20 per $100 borrowed (or 20%) on a $375 loan, it looks like this: 75 ÷ 375 = .2 x 365 = 73 ÷ 14 = 5.21 x 100 = 521%.

Again, the APR is astronomically higher than any other lending offered. If you used a credit card instead, even at the highest credit card rate available, you are paying less than one-tenth the amount of interest that you would on a payday loan.