Why Do Payday Loans Have Such High APR's?

Published: January 12, 2023
By the Pachyy Editorial Team
The Pachyy Editorial Team comprises a diverse and experienced team of writers, researchers and subject matter experts whose aim is to provide you with useful insights, guidance and commentary on all matters related to your personal finances.

As many as 12 million Americans take out payday loans annually, but there are alternatives to this short-term, high-cost borrowing option. Several other loan ‘types’ with unique characteristics can act as substitutes for payday loans if the borrower fits certain criteria.

What Is A Payday Loan?

According to the Consumer Financial Protection Bureau, a payday loan (also known as a cash advance or payday advance) is a loan that is typically due on your next payday and is generally for $500 or less.

Due to payday loans being short term and for small amounts, the interest rate charged is typically higher compared to a standard personal loan. This is primarily because lenders have fixed costs to cover (that don’t change regardless of the size of the loan or the length of the loan period) and because the average borrower has a low income and bad credit score.

Personal Loans

A personal loan is an unsecured loan that individuals can use for various purposes, such as consolidating debt, covering unexpected expenses, or financing home improvements. 

These loans typically range from $1,000 to $50,000, with a longer repayment period, (typically over several months or years), and lower interest rates (generally between 6% and 36%). 

However, obtaining a personal loan has some limitations. Lenders require borrowers to have a good credit score and a low amount of debt. Moreover, the application process for personal loans takes longer than payday loans. Finally, since personal loans are typically for more substantial amounts and longer periods, borrowers may pay more interest overall than they would with a small payday loan for a few weeks.

Installment Loans

Installment loans provide a lump sum of money that is repaid in regular payments over a fixed period. They can be secured or unsecured and used for various purposes, similar to personal loans. This type of loan is financially advantageous because borrowers can make equal payments over an extended period and budget accurately without feeling the pressure of repaying a loan in a short time.

Title Loans

A title loan is a type of short-term, high-interest loan that is secured against a borrower’s vehicle title. Similar to payday loans, the interest charged on title loans is still high. The amount you can borrow is based on the value of your vehicle, with lenders typically offering 25% to 50% of the appraised value.

Compared to payday loans, title loans offer higher borrowing amounts and lower interest rates. However, defaulting on a title loan could result in your vehicle being repossessed, unlike with a payday loan.

Title loans also typically require an in-person vehicle appraisal, meaning you cannot apply for them online.

Credit Alternatives

If you want to avoid payday loans or any other type of debt, there are some alternatives available:

  1. Other financial institutions: Some community banks and credit unions offer small loans with softer repayment terms. Credit unions may also offer Payday Loan Alternatives (PALs), which are typically less expensive than payday or title loans.

  2. Alternative credit sources: Consider looking for financing from friends, family, your local church, or a charity.

  3. Savings: At Pachyy, we encourage individuals to set up an emergency savings fund. Having a savings fund can help you avoid borrowing money if an unexpected expense occurs.

If you are considering a payday loan, it’s crucial to choose an ethical lender who prioritizes your interests. You can use our online application to determine if you are eligible for a payday loan. Our application is free, takes less than five minutes, and will not affect your credit score. Plus, you are under no obligation to accept a loan if you do not like the terms.