The Range of Average Interest Rates on Payday Loans

Pinpointing the average interest rates on payday loans is difficult because rates vary widely throughout the United States, and some regulations are in place to limit the rates that payday loan companies can charge. In any case, payday loans are expensive, and some consumer advocates assert that their lenders are preying on people who can least afford the loans.

Federal Trade Commission

The U.S. Federal Trade Commission calls payday loans "costly cash" in its description of how the loan process works. The loans essentially are a cash advance for which borrowers write postdated checks to secure the loans or agree to a future electronic transfer from their bank accounts on a specified date. According to the FTC, someone who needs to borrow $100 for two weeks may write a postdated check for $115 to the loan company. The extra $15 is the fee charged for borrowing the money. Borrowers can pay the loan on the due date or request that it be rolled over to pay at a later date. According to the FTC, the $15 dollar finance charge on a $100, two-week loan comes with an annual percentage rate of 391 percent. The finance charge increases to $60 on a $100 loan if borrowers roll over their loans three times.

Military Loans

An October 2007 National Public Radio report notes that a federal law has capped the interest rates on payday loans that military personnel pay. Payday-loan companies around military bases can't charge interest rates above 36 percent when loans are given to military personnel and their families. According to NPR, a $300 loan given to a soldier for two weeks that includes a $50 loan fee can cost as much as $700 after a few months. NPR says that amount could increase to thousands of dollars by the time the borrower manages to pay off the loan.

Regulations

Payday-loan stores in Washington, D.C., are required to charge the same annual percentage rates as banks and credit unions. A September 2007 "Washington Post" article notes that the D.C. Council voted to approve legislation that limits the annual percentage rate the stores can charge their customers to 24 percent. The "Post" reports that the rate adds up to 92 cents on a two-week, $100 loan. That's significantly less than the $16.11 fee per $100, along with additional fees and interest, that payday lenders previously charged.

Considerations

According to the "Washington Post," an adviser for the Community Financial Services Association asserted that limitations like those approved by the D.C. Council are ill-conceived. That's because payday lenders in other countries can still offer loans over the Internet, which is unregulated. "Reason" magazine notes that consumer advocates are usually against payday loans because they're often used by the working poor who get strapped with the high interest rates. A "Reason" article titled, "Payday of Reckoning," acknowledges that an annual interest charge of 400 percent or higher appears to be outrageous, but the article also notes that the typical borrower doesn't keep a payday loan for a year. Therefore, such rates aren't paid by most borrowers.

References

• U.S. Federal Trade Commission: Payday Loans Equal Very Costly Cash: Consumers Urged to Consider the Alternatives
• "Washington Post"; Bill to Cap Payday Loan Interest Rates Passes; Nikita Stewart; September 2007
• NPR; Payday Loan Interest Rates Capped at 36 Percent; Alison St. John; October 2007
• "Reason" magazine; Payday of Reckoning; Katherine Mangu-Ward; October 2009
• "Reason" magazine; Hit and Run blog; In Defense of Payday Lending; November 2010
• "Salt Lake Tribune"; Utah Bill Seeks to Stop Payday Loans From Spiraling; Lee Davidson; February 2011