What Is an Interest Rate on a Payday Loan: Variable or Fixed?

What Is an Interest Rate on a Payday Loan: Variable or Fixed?


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People who use payday loans have probably noticed that lenders often express their costs in a fixed flat fee without specifying an interest rate. But those who are financially savvy may have a few reasonable questions: “What is the average interest rate on a payday loan? Is a payday loan variable or fixed-rate?” Knowing the answers can help you better understand the cost of your loan and compare it with secured or unsecured personal loan options to make a weighted decision.

What Are Payday Loans?

A payday loan is a form of financial assistance that allows you to simply get one lump sum payment of up to $1,000. You need to repay your payday loan debt in full within two to four weeks, typically after you receive your next paycheck. Payday loans work in a way to provide borrowers with fast cash on any occasion. This is achieved by the lack of hard credit checks through major credit bureaus.

Payday lenders accept applicants with any credit score and don’t require collateral. Thus, payday loans are unsecured, short-term, limited loans with fast funding and lenient requirements.

Are Payday Loans Fixed or Variable?

Basically, a payday loan is a fixed-rate loan. A payday lender requires you to repay its initial amount plus interest rate in a single payment within up to 30 days. According to the Truth in Lending Act, loan providers are not allowed to charge any additional fees that are not specified in the loan agreement. This way, your loan cost is designed to always be predictable.

You can easily determine it by using a loan calculator. But this can be true only for those scenarios where you pay off your loan on time. If you default, you need to be ready to cover late fees that will be added to your loan cost. Also, this rule may not work if you deal with a predatory lender.

is a payday loan variable or fixed rate

What Are Average Payday Loan Interest Rates?

Payday loan interest rates are considered one of the highest in the lending industry. Based on averages, the cost of a $375 cash advance with the repayment period of two weeks will be nearly $75, which is about 521% APR. The exact value may vary depending on the state and the lender. Although payday loans have fixed rates, they are not the most affordable option.

What Are Fixed-Rate Loans?

A fixed-rate loan is a type of borrowing that has a constant interest rate. This means that it won’t fluctuate because of market conditions or inflation.

No matter what, your loan interest will be the same within the whole loan lifetime. Most personal loans have a fixed interest rate. Also, you can find fixed-rate mortgages, auto loans, and student loans, especially those that are a form of federal aid.

Definition of Variable-Rate Loans

Variable interest rate loans are those with interest that can fluctuate in case of various economic changes. Variable interest rates can either jump up or go down based on market conditions.

These loans are considered riskier, especially when you’re going to obtain one for a long period. At the same time, an initial variable interest rate can be lower compared to a fixed one. Some types of mortgages and credit cards are prominent representatives of loans with variable rates.

Fixed or Variable Rate – What Is Better?

People often prefer to obtain fixed-rate loans as they are more predictable. You can know for sure how much you need to pay each month. Thus, it will be easier for you to stick to your budget. At the same time, you can miss potential benefits if the interest rate goes down due to economic factors. However, it can also jump up and force you to pay more than you expected.

A variable-rate loan can be a great short-term solution. This is because they usually go with lower initial rates. But you need to consider the potential risks of increased payments. Summing up, there’s no single answer to this question. Just make your decision based on your current situation or seek credit counseling.

payday loan variable or fixed rate

Things to Know About Payday Loans

Payday loans differ significantly from traditional personal loans. This means that they can come with some peculiarities that you don’t expect. Here are things you need to know about this form of debt:

  • In most states, you won’t be able to borrow more than $1,000 with a payday loan;
  • Although payday loans have fixed rates, your loan cost can get out of hand if you fail to repay the money when due;
  • Payday loans tend to have relaxed eligibility requirements. They are available with bad credit and don’t require you to gather many documents or go through hard checks. However, they have higher interest rates;
  • Payday lenders can access a borrower’s bank account and withdraw money from it;
  • Although payday loans usually don’t affect your credit history, lenders will report your missed payments to credit bureaus.

In Conclusion – Is a Payday Loan Variable or Fixed Rate?

In theory, payday loans have fixed rates and are predictable. However, you need to keep in mind that late fees can be added and increase the loan cost if you don’t repay the money on schedule. Also, payday loans are an expensive form of debt, so you need to think twice before you obtain one.

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Kerry Vetter

Written by Kerry Vetter

Written by Kerry Vetter

Kerry is a finance expert thanks to her Boston College education during the 1990s. Today she shares this valuable knowledge through the pen and online from her home in Chestnut Hill, Massachusetts. The years of experience results in relevant, practical and wise advice.