Pay Day Loan Basics
What is the difference between a cash advance and a pay day loan?
A payday loan or a cash advance loan is a loan for a short time. You pay a fee to borrow the money, even if it is for a week or two. A pay day loan or cash advance loan can be very expensive. Before you get one of these loans, consider other ways to borrow.
How much can pay day lenders charge up to?
The loan amount is due to be debited the next pay day. The fees on these loans can be a percentage of the face value of the check — or they can be based on increments of money borrowed: say, a fee for every $50 or $100 borrowed. The borrower is charged new fees each time the same loan is extended or “rolled over.”
If you want to borrow $300 from a pay day lender, you pay a fee, usually $20 per $100 that you borrow. So you write a check to the pay day lender for $360.
The annual percentage rate is calculated on the cost of rolling the loan over every two weeks, for a year. You can calculate it by multiplying the two-week interest charge ($60) by 26 two-week periods per year ($60 x 26 = $1,560). You’d pay $1,560 to use $300 for one year. To figure out the annual percentage rate, divide the amount you’d pay for the loan in a year, by the loan amount: $1,560 /300 = 5.2. Multiply by 100 to get 520%. Some sources say they’ve seen payday loans with APRs as high as 7,000%!