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Could You REALLY Pay Off a 3-Month Payday Loan in 3 Months?

Andrew Tavin
Andrew Tavin covers budgeting and credit scores for OppLoans. His experience as a comedian lends an approachable and humorous angle to his content and makes the scary parts of personal finance less intimidating for readers.
Updated on May 6, 2021
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Sure, a longer payday loan means more time to pay the loan off, but it also means higher costs—with no additional benefits.

One of the biggest problems with payday loans is their incredibly short payment terms. With an average term of only two weeks, it can quite hard for most folks to pay the loan off on-time.

But recently some payday lenders have sought to offer payday loans with slightly longer terms, like three months. So are these a safer bet?

Let’s do some math.

In order to figure out the cost of a three-month payday loan, you’ll need a loan calculator. Since we haven’t perfected our loan calculator technology yet, we used this one.

You’ll also have to know how much you’re borrowing,  and it’s APR, or annual percentage rate. The APR measures how much a loan would cost you in fees and interest over the course of a full year. It’s a standard measure that lets you make an apples to apples cost comparison between loans.

Many payday loans have APRs as high as 400% (and some have APRS that are, gulp, way higher). But for now, we’ll use 300% as our APR, and we’ll use $1,000 for our loan amount.

If you take out a $1,000 payday loan at a 300% APR, you’ll need to pay back $1,536.90 at the end of three months.

So, is that realistic? Maybe. Three months to pay back $1,536.90 works out to a rate of $128.08 a week. But while those numbers might seem reasonable, the reality is something altogether different.

Paying off a 3-month payday loan in one lump sum is hard.

When it comes to loans, longer payment terms are almost always better. Longer terms mean more manageable payments and more opportunities to improve your credit score by making said payments on time.

And, hey, if you’re able to pay the loan off early, that’s great! You’ll save money on interest.

But with a three-month payday loan, all these benefits might be totally absent. First off, there are the more manageable payments, which a payday loan is unlikely to have.

Unlike installment loans, which break your repayment up into a series of smaller payments, payday loans generally rely on lump-sum repayment, which means that you pay the loan off all at once. (For more information on installment loans, check out the OppU Guide to Installment Loans here.)

Studies have shown that people have a hard time paying their payday loans back on time, and lump sum repayment is a huge factor. Paying a loan off in small chunks is much easier for them than saving up the money to pay off the entire balance.

In other words, saving up$1,536.90 over three months is a lot harder than only paying $128.08 once every week.

You can’t save you money by paying off a 3-month payday loan early.

Next, there’s paying your loan off early to save interest. This won’t work with most payday loans, as their fees and interest are charged at a flat rate. That means the interest doesn’t accrue on your balance over-time. Instead, it is calculated up-front and immediately added to your repayment amount.

When interest is being charged as a flat-rate, early repayment doesn’t earn you any discounts or added bonuses. Well, okay, it does get you out debt, which is pretty nifty. But if you’re going to take out a loan, you want one that can benefit your finances in the long-term.

Even leaving out their sky-high interest rates, payday loans offer very little in way of long-term benefits.

A 3-month payday loan won’t help your credit.

Lastly, there are the opportunities to improve your credit score. Even if a payday lender were to report your payments to the credit bureaus, paying the loan off in one payment would have a smaller positive effect on your score than paying it off in multiple installments.

But that’s pretty much a moot point, as payday lenders very rarely report any payment information at all.

Installment loans provide a better alternative.

Since coming up with $1,500 all at once is too big an ask for most people, you’ll may be better off getting an installment loan. That’s a loan that lets you pay back your loan a little bit at a time in series of smaller, regularly scheduled payments–each of which goes towards both the interest and the principal loan amount. You want a lender whose loans are designed to be paid off the first time, not the fifth.

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