Need Cash? Personal Loans Cost $446 Less Than Payday Loans

Loans, Payday Loans, Personal Loans
Personal Loans Offer Alternative to Payday Loans

Payday lenders seem to be everywhere, promising borrowers quick cash for a fee. While the fees are seemingly small at about $10 to $30 for every $100 borrowed, the costs can add up when borrowers roll over loans from one pay period to the next, resulting in an effective interest rate of 200%, 300% or more. And unfortunately, four out of five payday borrowers roll over their loans, according to the Consumer Financial Protection Bureau.

Payday lenders and car title lenders often target borrowers with bad or nonexistent credit who have limited borrowing options. However, there are an increasing number of options for borrowers with poor credit.

Alternative lenders

To showcase some options, NerdWallet compared payday loan rates with those of alternative lenders across the U.S. We looked at $300 loans lasting five months, which simulates the experience of a typical payday loan borrower, according to the Pew Charitable Trusts.

The study by Pew found that on average borrowers would pay $459 in fees for a $300 payday loan held for five months, while people borrowing from community banks and credit unions typically will pay about $13 in fees for a $300 loan.

The average cost for a $300 five-month loan ranged from $172 in Colorado, where such loans are strictly regulated, to $701 in Texas, where lenders on average charged an annual percentage rate of 454%. Fees for payday loans vary widely from state to state due to differing regulations. However, a $300 personal loan from a small bank or credit union on average costs $446 less than a payday loan.

NerdWallet’s study found that borrowers with poor or no credit history could get comparable loans for far less — even without fees or interest in some cases. Unsurprisingly, NerdWallet also found that borrowers with good credit could borrow more at a far lower rate than borrowers with poor credit.

Read this story for information about avoiding payday loans and to learn about other options for borrowing money.

Key findings

Borrowers pay $446 more for a payday loan than for a loan from a small bank or credit union. On average, payday loan borrowers pay $459 in fees for a $300 five-month loan. Many small banks and credit unions offer smaller or credit-building loans at much lower rates, normally about 18% APR. For a $300 five-month loan at an 18% APR, a borrower would pay $13.63.

Even the most expensive alternative lender is far cheaper than the typical payday loan. LendUp, an online alternative to payday lenders, offers loans at various rates and targets borrowers with poor or no credit history. Gold members can borrow money at a 145% APR, according to the company’s website.  Other lenders offer options if you have poor credit.

Some borrowers with bad or nonexistent credit scores can borrow $300 for free. SimpleFi is a credit score-blind organization that helps people tackle their financial problems. The service is offered in some states to teachers, military personnel, first responders and employees of participating companies. One option is a 0% interest $300 loan that borrowers can repay in semimonthly installments.

The average payday borrower pays four times more for a $300 loan than a borrower with excellent credit would pay for a $1,000 loan. Lending Club, an online peer-to-peer lender, offers a $1,000, three-year loan for $108.29 in interest payments. That compares with the average $459 in fees payday lenders charge for a $300 loan over five months.

Payday loans compared with personal loans

State Payday loan cost Average payday loan APR LendUp cost ($300 loan for 5 months) LendUp APR Credit union or small bank loan cost ($300 loan for 5 months) Credit union or small bank loan APR SimpleFi cost ($300 loan for 3 months, with semimonthly payments) SimpleFi loan APR Lending Club ($1,000 loan for 3 years) Lending Club APR
Alabama $525 461% $178.77 145% $13.63 18% $0 0% $108.29 6.8%
Alaska $500 435% Not available Not available $13.63 18% $0 0% $108.29 6.8%
California $450 411% $178.77 145% $13.63 18% $0 0% $108.29 6.8%
Colorado $172 129% Not available Not available $13.63 18% $0 0% $108.29 6.8%
Delaware $315 517% Not available Not available $13.63 18% Not available Not available $108.29 6.8%
Florida $345 304% Not available Not available $13.63 18% $0 0% $108.29 6.8%
Hawaii $529 461% Not available Not available $13.63 18% $0 0% $108.29 6.8%
Idaho $668 582% $178.77 145% $13.63 18% Not available Not available Not available Not available
Illinois $465 330% $178.77 145% $13.63 18% $0 0% $108.29 6.8%
Indiana $440 382% Not available Not available $13.63 18% $0 0% $108.29 6.8%
Iowa $390 339% Not available Not available $13.63 18% $0 0% $108.29 6.8%
Kansas $450 391% $178.77 145% $13.63 18% $0 0% Not available Not available
Kentucky $536 469% Not available Not available $13.63 18% $0 0% $108.29 6.8%
Louisiana $467 435% $178.77 145% $13.63 18% $0 0% $108.29 6.8%
Maine $250 217% Not available Not available $13.63 18% $0 0% Not available Not available
Michigan $425 369% Not available Not available $13.63 18% $0 0% $108.29 6.8%
Minnesota $288 252% $178.77 145% $13.63 18% $0 0% $108.29 6.8%
Mississippi $330 287% Not available Not available $13.63 18% Not available Not available $108.29 6.8%
Missouri $563 455% $178.77 145% $13.63 18% Not available Not available $108.29 6.8%
Nebraska $530 461% Not available Not available $13.63 18% $0 0% Not available Not available
Nevada $596 521% Not available Not available $13.63 18% $0 0% $108.29 6.8%
New Mexico $470 337% $178.77 145% $13.63 18% $0 0% $108.29 6.8%
North Dakota $610 530% Not available Not available $13.63 18% $0 0% Not available Not available
Ohio $680 591% Not available Not available $13.63 18% $0 0% $108.29 6.8%
Oklahoma $450 391% $178.77 145% $13.63 18% $0 0% $108.29 6.8%
Oregon $177 156% $178.77 145% $13.63 18% $0 0% $108.29 6.8%
Rhode Island $300 261% Not available Not available $13.63 18% Not available Not available $108.29 6.8%
South Carolina $450 391% Not available Not available $13.63 18% $0 0% $108.29 6.8%
South Dakota $660 574% Not available Not available $13.63 18% Not available Not available $108.29 6.8%
Tennessee $490 426% $178.77 145% $13.63 18% Not available Not available $108.29 6.8%
Texas $701 454% Not available Not available $13.63 18% $0 0% $108.29 6.8%
Utah $627 474% $178.77 145% $13.63 18% $0 0% $108.29 6.8%
Virginia $370 305% Not available Not available $13.63 18% $0 0% $108.29 6.8%
Washington $360 192% Not available Not available $13.63 18% Not available Not available $108.29 6.8%
Wisconsin $660 574% $178.77 145% $13.63 18% $0 0% $108.29 6.8%
Wyoming $300 261% $178.77 145% $13.63 18% $0 0% $108.29 6.8%

Note: Some states aren’t listed because storefront payday loans are available in 36 states only.

Payday loan alternatives

Payday loan rates and fees. For average payday loan rates and fees, we used data from the Pew Charitable Trusts. The study analyzed $300 loans lasting five months for the 36 states where payday loans are legal.

Lending Club rates and fees. Lending Club is an online peer-to-peer lender. For our study, we calculated the cost of a $1,000 loan for 36 months at a 6.8% APR, the best rate available to Lending Club borrowers.

Credit union and community bank rates and fees. Many community banks and credit unions offer payday loan alternatives such as small-dollar loans or credit-building loans. The actual rate borrowers pay varies from bank to bank, but for our survey, we assumed an 18% interest rate, the most common level in a small-dollar loans pilot program by the Federal Deposit Insurance Corp.

SimpleFi rates and fees. SimpleFi is a credit score-blind organization that helps employees with their personal financial problems. The organization offers credit counseling as well as loans. In addition to low-interest “Debt Clearing Loans,” SimpleFi offers interest-free “Quick Assist Loans.” Currently, SimpleFi loans are available in some states and only to teachers, first responders, military personnel and employees of participating companies.

LendUp rates and fees. LendUp is an online alternative to payday lenders. Loan rates decrease as borrowers pay off their debt. For our study, we based our calculations on a 145% APR, the rate available to LendUp’s gold members, according to the company’s website. We chose the gold level because entry-level borrowers are allowed to borrow $250 only. LendUp is available in select states, and the exact APR and fees may differ from place to place. LendUp doesn’t allow rollovers on loans, so our estimates are based on five successive 30-day loans.

 

 

Personal Loans Offer Alternative to Payday Loans

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A new version of this article was posted at 9:50 a.m. Pacific time on March 17.

Details about SimpleFi were updated March 19.

Image via iStock.