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How Can Payday Lenders Charge Such High Interest Rates?

If there’s one criticism of cash advance loans that you always hear about, it’s that they come with high interest rates. There’s no denying that fact. But if you understand how interest rates work, and how payday loans are designed to be used, you begin to see how higher rates can be justified.

How Interest Rates Work

When you borrow money–whether from a bank, a cash advance lender, or a friend—someone is taking a chance on you. They lend you money with the understanding that you will pay it back. If you don’t, they lose their money. That’s a risk that all lenders take. To compensate for that risk, banks and other lenders will charge you a fee—the interest rate—for the length of the loan. With conventional bank loans, your interest rate is tied to your credit rating. The better your score, the lower your interest rate. Longer loans also come with lower rates since the lender knows they will be earning money on your loan for several months or years.

How Payday Loans Work

The nature of a quick cash loan is part of the reason interest rates are higher. These loans are designed to provide emergency funds, so approval has to be quick. To do this, quick cash lenders do not conduct credit checks, nor do they require collateral for your loan. This means the lender has less security, since they do not have all the facts of your financial responsibility. And the truth is that these types of loans have the highest default rate in the financial industry. The higher risk factor means higher rates. Plus, the short turnaround of a quick cash loan means the lender must make their money on the loan in a short period of time, since you are only paying interest for a matter of days or weeks.

Minimize Fees by Using Quick Cash Loans Correctly

As long as you use the payday loan properly, you shouldn’t be adversely affected by the higher rates. First, always comparison shop. Cash advance lending is now a very competitive business, and the Internet allows you to do a lot of online research to find those businesses offering good rates and payment plans.

Second, never borrow more than you need. The more money you borrow, the higher your fees. Repay the loan back as soon as possible to keep your rates down, preferably your next payday. This means looking ahead, considering your upcoming expenses, and budgeting accordingly.

Finally, pay back what you owe on time. Doing so helps you avoid late fees and ongoing high interest charges. Your interest rates will most likely be shown as an upfront flat fee, the amount of which is tied into the amount you are borrowing. That fee, as with any other loan, is included in your payment. As long as you pay on time, you will not be charged any additional fees. Just consider this the cost of doing business. As long as you meet your end of the bargain, you won’t be charged additional fees.


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