Payday Loans: Debunking the Myth of Inflated APR Charges

Make no mistake about it – payday loans are no longer just loans for consumers to take out if they need access to fast money. These types of loans have quickly become political cannon fodder for government agencies, elected individuals and consumer watchdog groups. And as we all know very well, when something becomes politicized, people will say just about anything to get their way. The opponents of payday lending know that they can easily make accusations against the industry that tugs on the heartstrings of people around the country, and that by doing so they will further their political agenda.

One of the most heinous lies that gets passed around and picked up these days is the mistruth about payday lenders charging sky-high APR fees. You can look on the Internet and easily find dozens of articles where the charges are made that payday lenders charge 300 percent, 500 percent or even 800 percent APR. Those numbers are crazy-high, and it is easy to understand why people might think that if payday lenders are charging those kinds of APR fees that they are taking advantage of American consumers.

Here is the thing, though… Payday loans are one of the only forms of loans in this country that don’t ACTUALLY accrue APR. The mainstream journalists, consumer advocate groups and government agencies don’t what you to know that. They insist on spreading the obscene APR lie, and people seem to eat it up like candy. Payday lenders charge FLAT RATE FEES. What does this mean? It means that if someone takes out a loan, they pay a certain amount of money (in the form of a loan fee) plus the amount of money that they borrowed.

A lender might charge $15 for a $100 loan. The two weeks of the loan term goes by and the borrower pays the lender back $115. Seems easy enough to understand, right? No annual percentage rate was involved with this loan. The $15 fee did not accrue any interest; it remained the same flat rate that the borrower agreed to pay when he/she took out the $100 loan. So how are the opponents of payday lending able to get away with their outrageous claims?

It is simply a bit of book cooking that these folks are up to. They take the $15 fee and apply it to an absolutely worst-case-scenario type of situation. They suppose that the borrower just doesn’t pay the loan back on time, and rolls the entire amount over into a new loan, with an additional loan fee. So now that $100 loan would cost the borrower even more. Then they keep extrapolating the original loan out over the course of an entire year. That’s how they come up with those scary headlines about payday lenders charging super-high APR fees.

The math just doesn’t work out like that in the real world, folks. Sure, there are some people who are unable/unwilling to pay back their loans on the original due date. Some of them roll their loans over into new loans. The majority of borrowers, however, pay back their loan on time. There is no year-long journey of interest building up like crazy on these loans. The borrowers pay them back, and get back to business as normal. And the people that do roll loans over usually do so with paying the loan back as quickly as possible in mind. No one tries to see how long they can go without paying, as that would be crazy and super expensive.

Yes, some people wind up not paying at all too. The same way people decide not to make credit card payments or other types of loan payments. But those are outliers and by no means reflective of the vast majority of American consumers. Just as the people who don’t pay back their payday loans in a timely manner are exceptions and not the rule. Most folks pay their loans back on time, they pay the original flat rate loan fee and that is the end of the story. But that is a story the CFPB and other watchdog groups don’t want you to hear.