Are Payday Loans Fixed or Variable?

Inside Subprime: Feb 5, 2019

By Ben Moore

Loans either come with a fixed or variable interest rate. Fixed interest rate loans are loans for which the interest rate will remain the same for the lifetime of the loan. Fixed interest loan interest rates do not change regardless of how the market rate fluctuates, which results in payments being the same over the lifetime of the loan.

In comparison, a variable interest rate loan is a loan in which the interest rate charged on the outstanding balance changes as market interest rates change. As a result, monthly payments will
vary as well, increasing or decreasing in tandem with the market rates. In general, short-term personal loans tend to have a fixed interest rate and fixed repayment period. Lenders will perform a credit check to determine the interest rate at which the loan will be paid off.

Payday loans do not require a credit check, and applying for one does not necessarily impact your credit score, at least up front. Payday loans are often advertised as a quick solution for those who need cash urgently, and are particularly appealing to customers with poor or zero credit. As long as the borrower has proof of income, identification, and a bank account, they are likely to qualify for a payday loan. And once approved, the borrower receives the money immediately. Payday loans are fixed-rate loans, with interest rates that remain the same throughout the term of the loan.

How do payday loans work?

Although the structure of repayment for a payday loan can vary by lender, a borrower may be able to accept the lump sum as cash, via prepaid debit cards, or a direct deposit to their bank account. Payday loans are often made in the amount of $500 or less, although different lenders may offer higher loan limits or borrowers may want to take less than that. The repayment period on a payday loan is typically two weeks.

In terms of loan fees, many state laws set a maximum amount for fees ranging from $10 to $30 for every $100 borrowed. A typical two-week payday loan with a $15 per $100 fee equates to an annual percentage rate of almost 400 percent. By comparison, APRs on credit cards can range from about 12 percent to about 30 percent. In many states that permit payday lending, the cost of the loan, fees, and the maximum loan amount are capped.

However, some lenders will allow the borrower the ability to roll over a loan, which means the lender will extend the repayment period if the customer can’t meet the full payment at the end of those two weeks. The lender will charge an additional fee for a rollover, which can significantly increase the total cost of the loan. For example, taking out a $300 payday loan in Texas would cost a borrower $701 over the course of five months. Payday loans tend to trap borrowers in a cycle of debt because of rollovers, which drive up the overall cost of the loan over the loan’s lifetime.

For more information on payday loans, scams, and cash advances and check out our city and state financial guides including FloridaIndiana, Illinois, KansasKentucky, MissouriOhio, Texas and more.