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Getting Out of Paying Payday Loans: Things to Know

Getting Out of Payday Loans
Sulaiman Abdur-Rahman

Sulaiman Abdur-Rahman

Updated April 26, 2022
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
Payday loans are short-term consumer lending products that can carry high fees, especially when measured as an annual percentage rate of interest. A $100 payday loan with a $15 borrowing fee and 14-day repayment term equals 391% APR.One of the risks of payday loans is they can fuel a cycle of debt. Getting out of a payday loan is something a borrower can explore. Below we highlight how you may consolidate payday loans into something more affordable for you.

What Is a Payday Loan?

A payday loan is a short-term consumer lending product of less than $1,000 that charges high fees for every $100 borrowed. The repayment term of a payday loan may range from 14 days to 60 days.Payday loans are generally provided by alternative financial service providers who may charge $10 to $30 for every $100 borrowed. Fees of this magnitude can amount to 261% to 782% APR on a 14-day payday loan.Borrowers at the end of their payday loan term can repay the loan in full or receive a rollover extension that extends the term. Rollover extensions can fuel a cycle of debt, because rollovers may charge new fees in addition to the original costs of the loan.

How Do Payday Loans Work?

Payday loans work by providing borrowers with up to $1,000 and an obligation to repay the loan in a matter of days or weeks. A private lender may charge $10 to $30 for every $100 borrowed when disbursing payday loans.

Interest Rates

As mentioned above, private lenders may charge $10 to $30 for every $100 borrowed when disbursing payday loans. Fees of this magnitude can amount to 261% to 782% APR on a 14-day payday loan.

Examples

A lender can offer a $100 payday loan requiring the borrower to repay the $100 plus a $10 borrowing fee in 14 days. Repaying $110 on a 14-day payday loan that provided $100 in principal amounts to about 261% APR.The same lender can offer a $300 payday loan requiring the borrower to repay $300 principal plus a $90 borrowing fee in 14 days. Repaying $390 on a 14-day payday loan that provided $300 in principal amounts to about 782% APR.You may calculate the APR of a payday loan by following this formula:
  1. Divide the borrowing fee by the principal loan amount
  2. Multiply that figure by 365 days in a year
  3. Divide that figure by the term of the loan
  4. Multiply that figure by 100
When considering a $300 payday loan with a $90 borrowing fee and 14-day repayment term, the above formula calculates the APR as about 782%.

Consolidating Payday Loans

Consumers can use other financial products for consolidating payday loans. Borrowers, for example, can take out a personal loan and use the funds to pay off payday loans in full. Consumers in that case would replace their payday loan liabilities with personal loan debt.One of the benefits of a personal loan is it’s a consumer lending product that can be used for many purposes. Debt consolidation is one of the top reasons to apply for a personal loan.The average interest rate on a 24-month personal loan in the fourth quarter of 2021 stood at 9.09%, according to Federal Reserve data. Payday loans typically include high fees when measured as an annual rate of interest. Consolidating payday loans with a personal loan may help borrowers minimize their costs.Personal loans in some cases can include high fees. Among the disadvantages and advantages of personal loans include their potential to include high origination fees as a con and their potential to help consumers build credit as a pro.When comparing payday loans vs. personal loans, it’s clear that payday loans cannot meet your needs if you need to borrow more than $1,000. Among the personal loans that are unsecured with no collateral requirement, a consumer may need good credit to qualify for large loan amounts.

Avoiding Payday Loans

Payday loans may provide quick cash, but avoiding payday loans might be best if you can qualify for other forms of financing. As mentioned earlier, private lenders may charge $10 to $30 for every $100 borrowed when disbursing payday loans. Fees of that magnitude can amount to 261% to 782% APR on a 14-day payday loan.The average rate on U.S. credit card accounts assessed interest in the fourth quarter of 2021 stood at 16.44%, according to Federal Reserve data. Payday loans compared with credit cards generally feature much higher APRs than revolving credit products.

The Takeaway

Borrowers may have options on how to get out of payday loans. Borrowing money may help you meet your goals, so finding the best terms and conditions for you might be the best way forward.Lantern by SoFi can help you compare current rates of personal loans. Just provide basic information about yourself and the loan you need, and Lantern can guide you in the process to apply for a personal loan with the lender of your choice. Check your rate today and see if you prequalify.
Photo credit: iStock/time99lek
The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.LCPL0322024

Frequently Asked Questions

How can I legally get out of payday loans?
What are the options to consolidate a payday loan?
Can I close my bank account to stop payday loans?

About the Author

Sulaiman Abdur-Rahman

Sulaiman Abdur-Rahman

Sulaiman Abdur-Rahman writes about personal loans, auto loans, student loans, and other personal finance topics for Lantern. He’s the recipient of more than 10 journalism awards and currently serves as a New Jersey Society of Professional Journalists board member. An alumnus of the Philadelphia-based Temple University, Abdur-Rahman is a strong advocate of the First Amendment and freedom of speech.
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