Pay Day Loans How Do They Work?

You Need a Short-Term Loan You borrow a certain amount of money, normally for a short period like two weeks. You write a post-dated check for the amount of the loan, plus the interest. When the loan is due you can pay off the loan in cash and receive the check in return, or the check is cashed.

Interest Rate: An Example A typical loan would be $500 to be paid back in two weeks. The customer would agree to repay $125 for each $100 dollars borrowed. Total cost of the loan would be $625 ($125 X 5). How much is the interest rate?

Calculating the Interest Rate For a Two Week Loan Easy. If you pay back $125 for each $100 borrowed, you are paying an interest rate over the two week period of 25%. This is for two weeks. What would this rate be over a one year period (Annual Percentage Rate)?

Calculating the APR 25% X 26 Two week periods in a year This is 650% per year. Many people who receive a loan either fail to pay it off on time, or pay back only some of the loan. They then have to refinance. Many end up paying huge amounts over time for the initial loan.

Why Would a State Legislature Allow Any Company to Charge these Rates or Treat Low-Income People this Way?

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