# How to Calculate a Payday Loan

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Payday loans are loans that allow you to borrow money from an upcoming paycheck that you will use to pay it back. These loans are usually unsecured, meaning you do not have to back your loan with property and are fairly easy to get. However, that makes the loans riskier for lenders, so they charge high finance charges. These usually are a flat dollar amount rather than an interest rate, so you must manually calculate the interest rate. According to the Consumer Federation of America, more than \$35 billion in payday loans was issued in 2008.

Determine the amount of money that you will borrow, the amount of the finance charge and the term of the loan.

Divide the amount of the finance charge by the amount of the loan. For example, if the loan is \$200 and the finance charges are \$20, divide \$20 by \$200 to get 0.1.

Multiply the number derived in step two by 365 and then divide by the number of days of the loan. For example, you multiply 0.1 by 365 to get 36.5 and then if the loan is for 10 days, divide by 10 to get 3.65.

Multiply the number derived in step three by 100 to get the annual percentage yield, which is the interest rate you pay on your payday loan.

## Tips & Warnings

• Find another source of funds, such as family or friends, credit cards, and small bank loans, if possible, because most payday loans charge a very high rate of interest. If you have no other sources, shop around to find the lowest rate. According to the Consumer Federation of America, the average payday loan interest rate is 400 percent.
• You should try to maintain an emergency savings account with \$500 in case you need immediate access to funds so you do not have to rely on a payday loan. You can be sued in civil court to recover finances charges and loans if you default on the loan. Most states do not allow you to be prosecuted in criminal court for defaulting on a payday loan. Some states allow you to be prosecuted only if it can be proven you acted with intent, such as stopping a check to prevent repayment.

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