What is Interest? | Learning About How Payday Loans Work

Home » What is Interest? | Learning About How Payday Loans Work

If you need cash today and are considering applying for a payday loan with Direct Payday Loans, it is important to understand how the loan is going to work.

Every loan is composed of two different parts: principal and interest. This remains true whether you’re borrowing for a home, a car, or with a payday loan.

We addressed “principal” in this post. Now, we will focus on interest.

What is interest?

The main component of a loan is the principal amount, which is the initial amount you borrow. The second important component is interest. Interest is the charge a lender requires to allow you to borrow money. It is calculated based on the initial borrowed amount, but it is a separate charge.

The interest rate is usually expressed as a percentage of the amount you borrow. If you borrow $100 and the interest rate is 10%, you will owe $10 in interest charges when the loan comes due. When the loan is due, you will pay back the initial $100 principal amount in addition to the $10 interest charge for a total of $110.

Why does this matter?

When a person needs same-day cash, they often focus on the amount of money they need (the principal amount), but it is important to not forget the other component of every loan: interest.

When your loan comes due at your next payday, you will owe not only the principal amount but also all the interest that accrued over the time period of the loan. To calculate the interest owed, you simply multiply the principal amount by the interest rate to figure out the interest charges. It is imperative to understand how much interest you will owe at the end of the term before you agree to take on a loan.

While that sounds somewhat complicated, the good news is that with payday loans the math is usually fairly simple.

If you borrow from a payday lender, the interest rate will usually increase the more that you borrow. A general rule of thumb is that a payday lender will charge you $15 in interest per $100 of principal that you borrow. However, be sure to completely understand the terms before you agree to the loan and know how much interest will be due on your next payday.

Re-Borrowing A Loan

Interest charges are not a major problem as long as you are aware of them and pay them back on time. However, problems can arise if you are unable to pay back your principal and interest on your next payday and “re-borrow” the loan. This is also referred to as “rolling over” the loan or “renewing” the loan.

If you have re-borrow your payday advance because you don’t have enough cash to pay it back on your next payday, the interest begins compounding and can end up costing you a lot more than you planned for. Be sure to consider your total financial situation before agreeing to take a payday loan and have a plan to pay back your principal and interest on time.

If you are struggling to figure out how to pay for an unexpected expense, a payday loan can be a great option. Apply online with Direct Payday Loans to quickly compare terms from a number of lenders.