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Why a payday loan has higher interest than a bank personal loan

Ever wondered why a payday loan interest rate is higher than a banks personal loan The truth is, payday loans dont have an interest rate... instead a fee is charged.

Ever wondered why a payday loan interest rate is higher than a banks personal loan The truth is, payday loans dont have an interest rate... instead a fee is charged.

Why is a payday loan interest rate higher than a bank personal loan?

A payday loan is a short term, high risk loan, and is offered to anyone with no credit checks. Generally, payday lenders do not charge an interest rate, but instead charge a "flat fee" based upon the loan amount and the date the loan is repaid. Because of the lenders high risk and the short term of the loan, by comparing the fee to that a typical bank personal loan, the interest rate calculation is higher.

Typically, payday loans are short term advances which are due on the following payday, unless the payday is four or less days away from the loan date. In such instances, loan repayment becomes due on the subsequent payday, with a maximum loan term of 16 days.

A payday loan charges a flat fee, which is fixed per loan amount. This causes the Annual Percentage Rate (APR) to vary depending on the number of days between the date the payday loan was activated and the date it was repaid. There is no refund of fees for early repayment.

Payday loans are short term advances which recipients should repay quickly. Although payday lenders charge a flat fee, they must provide calculations as to their interest rate. Due to various Truth-in-Lending laws, disclosures must be expressed as an Annual Percentage Rate (APR), or the cost of the credit advanced expressed as an annual rate. This requirement provides uniformity among various lender resources, so borrowers can compare rates.

Most payday loan lenders require an active checking account, but some will offer a bank savings account payday loan. And there are lenders who offer a no fax payday loan.

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Submitted by Toni Phelps of www.CreditFederal.com
Read more of her loan articles.


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