Need Cash? Personal Loans Cost $446 Less Than Payday Loans
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Published on March 17, 2015 | Updated on September 4, 2015
Payday lenders seem to be everywhere, promising borrowers quick cash for a fee. While the fees are seemingly small at about $10 to $30 for every $100 borrowed, the costs can add up when borrowers roll over loans from one pay period to the next, resulting in an effective interest rate of 200%, 300% or more. And unfortunately, four out of five payday borrowers roll over their loans, according to the Consumer Financial Protection Bureau.
Payday lenders often target borrowers with bad or nonexistent credit who have limited borrowing options. However, there are an increasing number of options for borrowers with poor credit .
To showcase some options, NerdWallet compared payday loan rates with those of alternative lenders across the U.S. We looked at $300 loans lasting five months, which simulates the experience of a typical payday loan borrower, according to the Pew Charitable Trusts.
The study by Pew found that on average borrowers would pay $459 in fees for a $300 payday loan held for five months, while people borrowing from community banks and credit unions typically will pay about $13 in fees for a $300 loan.
The average cost for a $300
five-month loan ranged from $172 in Colorado, where such loans are strictly regulated, to $701 in Texas, where lenders on average charged an annual percentage rate of 454%. Fees for payday loans vary widely from state to state due to differing regulations. However, a $300 personal loan from a small bank or credit union on average costs $446 less than a payday loan.
NerdWallet’s study found that borrowers with poor or no credit history could get comparable loans for far less — even without fees or interest in some cases. Unsurprisingly, NerdWallet also found that borrowers with good credit could borrow more at a far lower rate than borrowers with poor credit.
Read this story for information about avoiding payday loans and to learn about other options for borrowing money.
Borrowers pay $446 more for a payday loan than for a loan from a small bank or credit union. On average, payday loan borrowers pay $459 in fees for a $300 five-month loan. Many small banks and credit unions offer smaller or credit-building loans at much lower rates, normally about 18% APR. For a $300 five-month loan at an 18% APR, a borrower would pay $13.63.
Even the most expensive alternative lender is far cheaper than the typical payday loan. LendUp, an online alternative to payday lenders, offers loans at various rates and targets borrowers with poor or no credit history. Gold members can borrow money at a 145% APR, according to the company’s website. Other lenders offer options if you have poor credit .
Some borrowers with bad or nonexistent credit scores can borrow $300 for free. SimpleFi is a credit score-blind organization that helps people tackle their financial problems. The service is offered in some states to teachers, military personnel, first responders and employees of participating companies. One option is a 0% interest $300 loan that borrowers can repay in semimonthly installments.
The average payday borrower pays four times more for a $300 loan than a borrower with excellent credit would pay for a $1,000 loan. Lending Club. an online peer-to-peer lender, offers a $1,000, three-year loan for $108.29 in interest payments. That compares with the average $459 in fees payday lenders charge for a $300 loan over five months.
Payday loans compared with personal loansSource: www.nerdwallet.com
Category: Payday loans