Payday loan interest rates explained
If your going to get a Payday loan, then if used responsibly, they are a great product, and can actually save you money if you are going to get charged for going overdrawn or get default charges, or they can get you out a short term financial fix, but if you use payday loans incorrectly, they can be very bad for your finances and your future credit rating.
So you are about to apply for a payday loan, and you have little or no intention of paying back the full amount of the loan at the end of the month on its due date. Please do not do it! It can get you into a lot of financial debt very, very quickly, and before you know it will spiral out of control. Why I hear you ask? This is due to the interest rate which is shown on most websites, also including ours, is around 1737% APR, but a lot of people tend to ignore this, and rightfully so as if you payback the loan on time the 1737% doesn‘t come into effect. This is due to the actual interest rate for the payday loan being around 25% for the term of the loan, usually never more than 31 days. Most people see the charges section, like on our website, and think they are only ever going to be charged 25% interest, so £25 for a £100 loan. £50 for a £200 loan and so on. This is actually accurate should you pay back the loan, including the interest, on the date agreed when you took out the loan.
However, Should you not pay your loan back on time, Firstly you will be hit with late charges and secondly with compounded interest. To work out compounded interest, you should work out the interest for the first period of 1 month, then add it to the total, then calculate the interest for the next period month 2 and so on and so on…. All the time adding interest to the total including interest not just the initial amount borrowed. This is very hard to explain in words so I’ll give you example in figures.
Let us take a simple £100 borrowed which gets charged 25% interest per month. In month 1 everything is going great and at the date agreed when you took out the loan you are due to pay your £125 back, which is your original £100 loan + your 25% interest which works out at £25. But you default on the loan and decide to try and roll it over to the next month, but when it comes to the end of month 2 you will owe £156.25, this due to the £125 from month 1 which you defaulted on + another 25% interest (£31.25). This is compounded interest.
So only 2 months down the line from when you originally took out the £100 loan, at the end of month 2 you now owe more than 50% interest of the original sum you borrowed, I‘m sure you will agree that’s pretty bad. It does however get worse, as the interest racks up and the amount you owe goes up, the monthly interest amount compared to your original loan increases massively.
Now lets look at month 3, you would now owe a total of £195, this is made up from £156.25 from month 2 (remember month 2?) + 25% of the total you now owe £39. Then in month 4 you would owe £243.75 which is the total of month 3 £195 + 25% of the total owed £48.75. This carries on until at the end of month 12 you owe £1452 from your original £100 loan. In reality you will actually be charged more as the lenders can and will add charges if you miss payments, but get this you will also be charged interest on the charges!!! That is how we get to the figure of 1737% APR. This is the amount you will end up paying and be in debt by if you fail to pay back your loan for a 12 month, a yearly interest, or Annual percentage rate (APR)
That is some pretty shocking reading isn’t it, but i only used as an example £100, lets take a look what would happen if I used the max payday loan amount of £1000, in 4 months of defaulting your £1000 loan you would owe £2437.50, and within a year of defaulting your £1000 payday loan you would owe a whopping £14520, that’s a huge £13520 of interest in a year on your original £1000 borrowed. As you can see you should only use a payday loan if you are confident you are going to be able to pay it back on the date agreed when you took the original loan out. And please, should you get into difficulty, contact your lender as quickly as possible, then try to come to an arrangement with them, the worse thing you can do is to leave it and try to ignore the debt.
You can contact piggypayday.co.uk if you are having difficulty and are unsure what to do and we will be happy to point you in the right direction. Even if you want to arrange a consolidation loan to pay off your payday loans we can help.
Obviously we are not against payday loans as we run a payday loan company, and believe we provide a genuine, necessary service, and that payday loans can actually get people out of financial difficulty and help them get back on their feet. But we need to better educate some people as to the pitfalls of taking out a payday loan, and how bad they can be if not used correctly. Should we be able to help one person not get into severe debt by them from reading this article then we will be very happy, but hopefully a lot more will benefit from reading this.
Payday loans are not all bad news, should you use them correctly and you pay the full loan back on the due date then you will only pay back the loan, plus interest, at the rate you have been quoted at around 25%, dependant on how many days you want it for. And should use a payday loan correctly then it can boost to your finances when you need it most.
I hope you enjoyed and benefit from reading it, please leave a comment below.
I personally would like to see a cap on the amount of times a payday loan can be rolled over to say around 3 months, what do you think?