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Media > Newsletters > Consumer Advocate > December 2012 > Payday Loans Pack an Interest Rate Punch

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Payday Loans Pack an Interest Rate Punch

When cash is in short supply, a payday loan may sound like a wonderful solution. A short-term payday loan can help you purchase what you need before your next paycheck. While you might be tempted to apply for a payday loan if strapped for cash, you may want to think twice.
Payday loans originated as loan amounts equal to the amount of the borrower’s paycheck. Now, consumers can receive payday loans at any time, and generally a payday loan refers to a short-term loan between $100 and $500.
A payday loan works like this: You apply for a loan either online or in person. You may have to prove some sort of income through a paystub. The lender deposits the loan directly into a checking account with the expectation that you will pay it back within a specified time period, usually about two weeks. The interest rates for the loans are very high, so it can be hard to pay back the loan immediately. A typical payday loan interest rate is about $15 on every $100 borrowed. While this may not seem high, the Annual Percentage Rate (APR) is more than 390 percent, and consumers often struggle to pay off the balance while covering other expenses. If the loan is extended, you likely will be charged additional fees, resulting in higher amounts of money owed.
According to the Pew Charitable Trusts’ Safe Small-Dollar Loans Research Project, about 5.5 percent of adults in the continental United States and about 10 percent of Ohioans have used a payday loan in the past five years. Most people who receive a payday loan utilize a storefront rather than applying for one online (though Ohioans should be wary of online payday lenders). The study found that people who use payday loans take out an average of eight loans per year averaging $375 each. Consumers spend about $520 on interest payments for these loans every year. 
To avoid the high cost of payday loans, consider alternatives such as:
  • Cutting back on expenses
  • Going to a bank or credit union for a short-term loan
  • Borrowing from friends or family members
  • Contacting your creditors to create an alternative payment plan
These alternatives may not be ideal, but they could cost you much less in the end. If you decide you need a payday loan, make sure you read and understand the terms and conditions, including interest rates, payback dates, and extension fees.
For an overview on payday loan regulations and who uses payday loans, visit