Is A Payday Loan Variable Or Fixed Rate? Know Before You Owe

Posted on December 15, 2022 in Loans

Payday loans have a fixed interest rate as opposed to a variable interest rate. This is because the cash loans are expected to be repaid in one lump sum payment. The federal Truth in Lending Act requires payday lenders to disclose any finance charges imposed on a loan.

According to recent payday loan statistics, 80% of consumers roll over their payday loans, and 93% regret taking them. Most of them agree that payday loans don’t liberate them financially. Instead, they lead them to a continuous cycle of debt.

Before taking payday loans, you must understand what these loans are, how they work, whether their interest rate is fixed or variable, and what alternative means are available. This will play an essential role in avoiding the unending cycle of debt.

So, what are payday loans?

What is a payday loan?

A payday loan is a kind of unsecured personal loan. Its predatory nature sets it apart from other personal loans like secured and installment loans. Since they’re unsecured (you don’t have to offer collateral), lenders charge a high-interest rate. It varies from an APR of 400% to 700% compared to credit card interest, which is around 12% to 30%.

This high APR depends on the following;

  • The amount borrowed
  • The type of lender
  • The repayment period

Let’s get an understanding of how these payday loans work.

How do payday loans work?

Payday loans charge high-interest rates but act as quick cash fixes when faced with an emergency. They’re a convenient option if;

  • You’ve got a poor credit score.
  • You’re seeking to rebuild your credit score
  • You need access to cash immediately. You can even apply online.

Lenders overlook your debt history. Your pay stubs are the only thing you need to present to secure a payday loan.

Typically, one of the payday loan requirements is that you’ll have to pay back your loan with your next paycheck. That’s in two or four weeks. But you can roll over the payment if you cannot make the total lump sum payment. However, this attracts penalties, thus raising your APR further. Some lenders won’t charge you based on an APR; instead, they’ll offer you a flat rate of $15 for every $100 you borrow.

You must repay the payday loan on its due date to avoid further fines and penalties. Repayment of the loan can be made by;

  • The lender deducts the loan amount and its fees electronically from your checking account
  • The lender withdraws a post-dated check that you offered them.

Beware of the repayment terms and services of your loan to avoid predatory lenders. Also, ensure you have the required amount available for the full repayment of the loan in your account to avoid overdraft charges from your financial institution.

With that out, let’s get to the gist of fixed and variable rates.

What’s the difference between fixed and variable rates?

All loans have an interest rate. The interest rate is what you pay up extra to the principal amount. This interest rate can be fixed or variable.

i. Fixed interest rate

Fixed interest rates don’t change over the entire loan period. The initial amount you were to pay at the beginning of the loan period won’t significantly differ from the total amount you will pay at the end.

Unforeseen market conditions cannot influence fixed interest rates, making them stand out since you can;

  • Calculate the total amount you’ll pay at the beginning of the loan period
  • Plan how to make your payments on time

Loans with fixed rates include home and car mortgages.

ii. Variable interest rates

Variable interest rates tend to fluctuate over time. These interest rates depend on an index rate that consists of specific benchmarks. These benchmarks are prone to current market conditions, making them volatile. As such, you can’t tell the amount expected to be paid back at the end of the loan period.

You’ll pay a small interest fee if luck is on your side. If not, it can rake up a substantial amount. To play safe, you should consider a short-term variable rate loan.

Are payday loans fixed or variable interest rate loans?

Since you can calculate the cost of payday loans from their onset, they’re fixed-interest rate loans. Usually, you will pay the total amount of the payday loan in your next paycheck. Therefore, budgeting for these loans is possible.

You should note that any late repayment, rollover of the loan, or default will attract additional charges and penalties that can result in a never-ending debt cycle. So, make your due payments on time.

Five alternatives to fixed rate payday loans

A number of personal loans can substitute the high-interest payday loans. To sort out your emergency needs, check them out before considering the option for payday loans. These options include;

a. Secured personal loans

Unlike payday loans, you need collateral to qualify for a secured personal loan. The advantage of secured personal loans is that you’ll get access to a significant cash fix of up to $100,000. It also has a low fixed interest rate and a flexible repayment period. On top of that, your credit rating will improve once you complete paying up the loan.

b. Payday alternative loans

Payday alternative loans are a form of payday loans offered by federal credit unions. They have a fixed interest rate of less than 28%, making them a much safer borrowing option than high-interest-yielding payday loans.

Upon joining a credit union, you can access the loan immediately or after a month. The credit unions can loan you up to $2,000, with the repayment period ranging from six to twelve months. All you’re required to do is make an application fee not exceeding $20.

c. Co-signing a loan

Co-signing a loan is when you get someone with a good credit rating to be your guarantor. This will help in the approval of your loan. You’ll also get a favorable credit record if you make consistent paybacks throughout your loan period.

Co-signing is an excellent option, as you’ll get a lower interest rate and a logical repayment period based on your income. It also offers a fixed interest rate on your loan.

However, your co-signer should know their rights before agreeing to this idea.

d. Personal installment loans

Personal installment loans offer you a fixed rate loan opportunity. Similar to a long term loan, the lender will loan you the money, and you’ll be subjected to make fixed monthly installments until you repay the loan with its associated fee.

e. Emergency savings fund

Getting cash from your emergency savings fund is an ideal way to save your ass when faced with an emergency. This is cash you’ve been consistently saving for these situations. You won’t need to pay any interest or transactional fees since it’s the cash you’d put away in some envelope. Having these emergency funds is a sure way to avoid payday loans.

FAQs About If A Payday Loan is Fixed Or Variable Rate

Don’t go for a payday loan without considering the answers to the following questions. They’ll help you ascertain your worries about whether or not it’s a good idea to take a payday loan. Let’s get into them;

Can I get a payday loan using a prepaid debit card?

Yes, you can get a payday loan using your prepaid debit card. The only downside for this is that you’ll pay additional charges. Considering the high-interest rate on the payday loan, why don’t you go for a debit card cash advance from your bank or credit union? These loans come in handy if you’ve got money sitting in your checking account.

How do payday loans impact my credit score?

Payday loans can be a pain in the ass or the much-needed relief to your credit score. If you default on the loan, lenders will report you to credit bureaus, where your credit score will suffer badly. But this narrative can change if you make timely payments to cover your payday loan. The only problem is that your lender may fail to report timely payments, which can positively influence your credit score.

Must I have a bank account to access a payday loan?

Having a bank account to qualify for a payday loan is not a must. However, if you do not have a bank account, lenders will take advantage and charge you high-interest rates. This can lead to a never-ending debt cycle.

How much will I get by applying for a payday loan?

Unlike secured loans that offer upwards of $100,000, you can get up to $500 when you apply for a payday loan. Some lenders offer as high as $1,000. When going for these loans, make sure you can afford the high-interest rates that come with them.

Conclusion About Payday Loans Being Fixed or Variable

Payday loans can be a quick cash fix, but if you cannot pay them off in your next paycheck, you’ll end up in a never-ending debt cycle. We hope that with an understanding of payday loans, their high fixed interest rates, and transactional charges, you can opt for better alternatives to quick cash fixes. Remember, nobody wants to get in over your head with payday loans, so be sure to do further research before making any final decisions.

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