Getting a payday loan is always tricky because you know their annual percentage rates. Now, it’s time to discuss their interest rates. Are they fixed or variable? “Will I pay the same interest or vary during the repayment term?” Let’s find out together!
Table of Contents
- Payday Loan Interest Rate: Fixed or Variable?
- What are Loans with Fixed Interest Rates?
- What are Loans with Variable Interest Rates?
- Payday Loan Definition
- Who Qualifies for Payday Loans?
- What Are Average Payday Loan Interest Rates?
- Factors Affecting Payday Loan Interest Rates
- Things to Know About Payday Loans
- Comparison of Fixed and Variable Interest Rates: What’s Better
- Consumer Protection Regulations
- Conclusion - Is a Payday Loan Variable or Fixed Rate?
Payday Loan Interest Rate: Fixed or Variable?
Payday loans are fixed-rate loans which means they have the same interest during the whole repayment schedule. Payday lenders typically don't even discuss their charges in terms of an interest rate. They call it a fixed flat fee because the loans are designed to be paid off in one payment. This way, borrowers can always predict the costs of payday loans.
To clarify, let’s start with the definition of loans with fixed and variable rates.
What are Loans with Fixed Interest Rates?
A fixed-rate loan has a constant interest rate that doesn’t change because of market conditions or inflation. Examples of fixed-rate loans are personal loans such as mortgages, auto loans, and student loans, especially those that are a form of federal aid. People tend to apply for such loans thanks to their predictability. However, its main disadvantage is that you’ll have no benefit from any interest rate fall.
What are Loans with Variable Interest Rates?
A variable-rate loan has charges that can fluctuate in case of various economic changes. In this case, it is hard to predict the market behavior and have a clear understanding of all fees and charges applied. They are riskier, especially if you choose the longer repayment term. There are three main types of variable rate loans: tracker rate mortgages, discount rate mortgages, and credit cards.
Payday Loan Definition
A payday loan is a short-term financial product you borrow from a payday lender to cover unexpected expenses that can’t wait until your next paycheck. Once you receive it, you’ll repay the loan with one lump sum payment.
Who Qualifies for Payday Loans?
Before borrowing money from payday lenders, people must know how to qualify for a payday loan with no faxing. Here are the eligibility requirements to meet:
- Be at least 18 years old;
- Have permanent residence or US citizenship;
- Have a valid bank account;
- Have an active email address and phone number.
The eligibility criteria may vary by lender and state. There are also some payday loan options that don't require a checking bank account.
What Are Average Payday Loan Interest Rates?
We’ve already answered the question: is a payday loan variable or fixed? Now, it’s crucial to mention that payday loans are considered the most expensive financial tools in the lending niche. Their average interest rates may vary by lender and state. Payday lenders usually charge $15 - $20 for every $100 borrowed. The repayment schedules vary from seven to 30 days. The annual percentage rates range from 391% to more than 521% for payday loans. Although payday loans have fixed rates, they are not the most affordable option.
Factors Affecting Payday Loan Interest Rates
Even if we said that payday loans are fixed-rate loans, their interest might be affected by natural factors that are worth considering:
Here, we discuss competition that sometimes can affect payday loan interest rates positively. In areas where there are many payday lenders competing for customers, interest rates may be lower as lenders try to attract borrowers.
The loan amount and repayment term
Lenders may provide different interest charges depending on the loan amount you want to borrow and its duration. For example, if you borrow a 500-dollar loan for 14 days, you’ll pay $156.25 in interest. But if you choose the shorter term (14 days), you’ll pay an extra $79.10.
Your credit score is one of the most important factors when qualifying for a payday loan. Payday loans are more expensive if you have a bad credit score. Payday lenders must secure their risks by charging more interest for poor credit scores. The same also happens for an unsecured personal loan.
Depending on the legal and state regulatory environment, lenders may suffer some caps on interest rates or other restrictions, which can affect the rates they charge. For example, in Vermont, there is a cap of 18% per year for small loans if their repayment schedules don’t exceed one month.
Things to Know About Payday Loans
If you think you know everything about payday loans, here is what you missed:
- Payday loans work like cash advance loans but have high-interest rates.
- The maximum payday loan amount is $1,000, depending on the state.
- Arkansas, Connecticut, and the District of Columbia have banned payday loans because of too high loan rates.
- The range of payday loan terms varies between seven and 30 days.
- If you don’t repay the loan on time, the lender has the right to charge additional fees for late repayment.
- A payday loan debt can’t affect your credit history.
- The loan providers can access a borrower’s bank account and withdraw money.
Comparison of Fixed and Variable Interest Rates: What’s Better
At first sight, it may be easy to choose between fixed and variable rates, but reality changes when you dive deeper into understanding these concepts. That’s why we’ve listed the main factors you should consider when comparing fixed and variable interest rates:
- Risk tolerance: Fixed loan rates provide stability and predictability, while variable rates may fluctuate. If you can’t tolerate financial risks and manage them in a timely manner, a fixed rate may be a better option for you.
- Flexibility: Variable-rate interest loans typically offer more flexibility, as they often come with fewer restrictions and often have no penalties for early repayment. Fixed rates, on the other hand, may come with higher charges if you repay the loan earlier.
- Current financial situation: Your income and basic expenses should also be considered when choosing between fixed and variable rates. A variable rate may be a good choice if you have a steady income that allows you to make payments.
Consumer Protection Regulations
One major regulation governing payday loans is the Truth in Lending Act (TILA), which requires lenders to show the total cost of the loan, including the APR (annual percentage rate). This percentage contains not only the interest rate but also any fees associated with the loan, such as origination fees or late payment fees. That’s why all potential borrowers must read the loan contract before signing it blindly.
Another important regulation is the Military Lending Act (MLA), which specifically applies to loans made to active-duty military personnel and their dependents. This regulation sets a cap on interest charges for these loans, depending on the state and its payday lending laws.
Conclusion - Is a Payday Loan Variable or Fixed Rate?
As a bottom line, ASAP Finance answers your question one more time: a payday loan is a fixed-rate loan. If you don’t like payday cash loans, maybe you should try personal loans or guaranteed installment loans for bad credit. Some are considered variable-rate loans that can benefit from lower interest charges if the market changes. Who knows?
Anyway, before choosing between fixed or variable-rate loans, find and borrow money only from trusted loan companies and avoid predatory lending practices. Get a payday loan only if you are sure you’ll cover it on time.