When choosing a payment method to make a purchase, you generally want to choose the payment method that has the lowest interest rate attached to it. The lower the interest rate, the less money you will end up paying back in additional interest over time. There are a multitude of payment methods to choose from, from credit cards to personal loans to payday loans, and each of these payment methods have different interest rates attached to them. So which payment method charges the highest interest rates?
Payday Loans Typically Have The Highest Interest Rates
When comparing all of the different payment methods available, payday loans are the payment methods that typically have the highest interest rates attached to them. A payday loan is a fast loan usually obtained from a store-front shop that is used to bridge financial gaps between paydays. For these loans, there is generally little examination of the borrower’s finances outside of reviewing a recent paystub and the borrower having an active checking account.
The fees for a payday loan are typically about $15-$20 for every $100 borrowed, so a $400 payday loan would have between $60 and $80 added for repayment. Because the loan must typically be paid back when the borrower gets their next paycheck, generally a two-week period, the interest rate for the payday loan works out to a whopping 391% APR (annual percentage rate). If the borrower is unable to pay back the loan at that time, the loan is often rolled into a new loan with additional fees and interest to pay.
How Payday Loans Compare To Other Payment Methods
With an APR of nearly 400%, the interest rate for a payday loan is considerably higher than the interest rates associated with other payment methods. The payment method used by most people with the second highest interest rate is using a credit card, and credit card APR’s typically range between 15% and 30%. Personal loans, which are used by fewer people but are still popular, have interest rates that can be as high as 35% depending on the borrower’s credit score.
Payday loan lenders can get away with charging the interest rates they charge because payday loans are designed to get fast cash to people that don’t have many options. Getting a payday loan is easy with few requirements and no check of the borrower’s credit history. People that cannot qualify for a personal loan or a credit card can get a payday loan in a matter of minutes.
Conclusion
Payday loans are considered by many to be the worst choice of payment methods available due to their sky-high interest rates and short repayment window. While the loan may be quick and easy to get, the amount that you must pay for them make them hardly worth the cost and it is easy to get trapped in a cycle of debt with them. Explore all of your other payment options before resorting to payday loans.
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