More than 12 million Americans used payday loan services last year, paying between 300 to 400 percent APR for a short-term cash advance, according to a study by the Pew Center on the States.
The average loan is for $375, and the average borrower holds it for 5 months, paying a total of $520 in interest, the study found.
If you're unfamiliar with payday loans, here's how they work: A person needs short-term cash. He or she goes to a payday lending institution and borrows money, generally pledging to pay around $15 for every $100 borrowed. The person is given the loan for a couple of weeks.
On the surface, that sounds like a 15 percent interest rate -- except the borrower is given the loan for only a couple of weeks, which means the loan really has a triple-digit APR.
Furthermore, many borrowers can't repay the original loan balance when the loan comes due, so they roll it over into a second loan. The second loan includes the original principal and interest, plus a rollover fee, which the borrower pays interest on. If the borrower can't pay back the second loan when it comes due, they roll it over again, and the third loan contains principal, interest, two fees, plus the interest accruing on those fees.
In other words, the loan compounds quickly.
Of the 12 million people who used payday loan services last year, 70 percent say they used it for everyday purchases, including 5 percent who spent it buying groceries.
And here's something that may surprise you: more than 40 percent of payday loan borrowers are homeowners, and more than 25 percent of earn more than $40,000 per year.
Want to learn more? Discover out how to get out of debt and how to earn more money here.
Source: Original reporting in TIME Moneyland.
Source: http://budgeting.about.com/b/2012/07/20/paying-300-to-400-percent-apr-payday-loan.htm
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