Instant Payday Loans: A Complete Guide

Jasmine from Team Brigit

June 6, 2019

While instant payday loans might offer a quick fix, they do not offer a permanent solution for money problems. Although tempting, taking out payday loans to cover your needs makes less sense than saving. Payday lenders do not have your best interest at heart when you’re searching for an instant money solution.

Let’s take a look at what a payday loan is and how a payday loan works.

What is an instant payday loan?

A payday loan is a relatively short term loan of typically $500 or less, lent at a high rate of interest, that it will be repaid when the borrower receives their next paycheck.

In order to apply for a payday loan, you must submit some form of identification and provide your banking information. If approved, you typically receive the funds instantly or within 24 hours. Payday loans can range from $50 to $1,000.

State laws usually set a maximum amount of payday loan fees. They can range from $10 to $30 for every $100 borrowed. Typically, a two-week payday loan with a fee of $15 per $100 borrowed has an annual percentage rate (APR) of almost 400%!


How do you calculate the APR?

An APR, or annual percentage rate, is your interest rate stated as a yearly rate. An APR for a loan can include fees you may be charged, like origination fees. An origination fee is a fee charged to process your application. APR is important because it gives you an idea of how much you’ll pay to take out a loan.


How do you calculate the APR of a payday loan?

To calculate the APR of a $500 payday loan that has a 14-day term and charges $20 for every $100 borrowed:

  1. Divide the total loan amount ($500) by 100 = 5
  2. Multiply the result (5) by the fixed fee ($20) for every $100 = 100
  3. Divide the finance charge ($100) by the loan amount ($500) = .2
  4. Multiply the result (0.2) by the number of days in the year (365) = 73
  5. Divide the total (73) by the term of the loan (14) = 5.21
  6. Multiply the result by 100 and add a percentage sign. = 521.42%

Why are instant payday loans dangerous?

Payday loans may help you when you’re in a tough spot but they come with high fees. High interest fees and charges can cause a borrower to pay more in the long run for a payday loan.

Therefore, instant payday loan borrowers end up in default 20% of the time, either on their first loan or after reborrowing. Over 80% of all payday loans are rolled over within 30 days of the previous loan. Meaning, borrowers tend to take out another payday loan to cover the cost of their first.

The short term repayment model for payday loans can also cause borrowers to fall into a cycle of debt because repayment is due with their next paycheck. Failure to payback a loan can lead to more fees and negatively impact your credit score.

In many states, instant payday loans are prohibited with some states capping the limit on interest rates on consumer loans to protect consumers.

Alternatives to taking out a payday loan

Personal loan

A personal loan is provided for emergency situations. The first step to getting a personal loan involves checking your credit score. These can come with high fees so beware.

Credit union loan

If you’re a member of a credit union you may qualify for a loan with a lower APR. Please note, credit unions typically charge an application fee.

Try Brigit

For $9.99 / month, you’ll have access to up to $250 when you need it, balance alerts and express delivery. With Brigit, there are no delivery fees, no interest or hidden fees, and best of all, no tips! Brigit does not run a credit check which saves your credit score in the long run. You’ll also get free extensions because we know that sometimes things come up.

Ultimately, payday loans can lead to long-term debt burden. That’s why we recommend planning for large expenses in advance but of course, life gets in the way and emergencies tend to happen. We at Brigit offer financial assistance to financially responsible people.

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