The APR for a typical loan of $2,600 is 99.25% with 42 monthly payments of $216.55
Yes, you read that right. The interest rate is almost ONE HUNDRED PERCENT. A person taking out such a loan will end up paying back a total of $9,095.10. Their commercial makes it sound like they're lending money because they "trust" people, but that's certainly not the case. I suspect that at least one of the two following things is true:
- The people taking out these loans have a very high default rate. And I mean very high; if they were giving these loans at 30% (which is a typical rate for people with credit cards who have made a ot of late payments) then the monthly payment would be $100.69 over 42 months (see this calculator), for a total amount paid of $4,228.98. So I'm inclined to assume that the percentage of people who pay their loans back is less than half of the percentage who pay their credit cards back.
- There's not much competition for this sort of loan; people actually see this commercial and make a phone call without bothering to shop around. This seems pretty reasonable, because the sort of people who would shop around for the best deal are probably less likely to get themselves in this sort of trouble in the first place. Therefore, the loan companies charge the highest interest rate they can legally get away with. In fact, it wouldn't surprise me to learn that in the state where these
(Incidentally, I was looking for something to calculate the payments on a loan for me; the first google hit; I wanted to check the payments on the CashCall.com loan. It complains that 99.25 is not in the range from 0.01 to 99 and so I couldn't possibly have meant that interest rate. I did!
Here are CashCall.com's rates; it seems that in states where larger loans are offered, such as California, the interest rates on those larger loans are lower (as low as 21%). Also, for some reason they only offer loans in the amounts of $1,000, $2,000, $2,600, $5,075, $10,000, and $20,000; does anybody have any idea why?
As for the high interest rates, I've heard that small payday loans -- say, the type where someone borrows $100 and has to pay back $115 a couple weeks later -- have to have high interest rates because the cost of doing all the administrative work for the loan needs to be covered. But it seems a lot harder to believe this on loans such as those given by CashCall.com.
This reminds me of the Comcast "Service Protection Plan" I wrote about a few days ago, which I concluded was a ripoff. I was telling my father about this today, and he pointed out that "if they're trying to sell it to you, they expect to make money off of it". The difference is that Comcast was talking about a few dollars a month, whereas payday lenders are giving people a way to really trash their financial lives.