Why Are Payday Loans Sometimes So Expensive?

A payday loan is something that should be approached with caution if you’re not experienced with handling your finances. While it’s a useful tool by default, it also has the potential to affect your situation in a very bad way if you’re not careful. There are certain factors that you should keep in mind at all times, and be prepared to get the loan paid off as quickly as possible in order to prevent any complications in the future.

The most common question people usually have regarding these loans is about their overall cost. It’s not rare to hear stories about people who’ve gone into deep debt as a result of taking out a payday loan, which can sound scary. But once you dig into those stories a bit, some common pattern of irresponsible behaviour usually shows up. A payday loan doesn’t have to be expensive if you use it the way it’s intended to be used in the first place.

How It Works

Payday loans are designed to be paid off much faster than regular ones. As the name implies, the typical duration of a loan of this type is until your next pay check – or roughly a month. There might be some exceptions, but that’s how most lenders typically work. Because of that, payday loans also have a very high interest rate attached to them. The consequences for not paying off a payday loan on time can be severe, and you should not underestimate how quickly that interest can stack up if you’re not careful.

The Limitations of Bad Credit Score

If you have a bad credit score, this means you’ve done some things in the past which can make you seem like a higher risk than a regular customer. Defaulting on a previous loan is a common example, but even smaller things can still play a role in lowering your credit score. Being late on your bill payments is something that can mess up your situation quite fast.

People with low credit scores are typically forced to look into payday loans as their only viable option. This can contribute to the negative reputation of these loans, as the kinds of people who need to use them are also the ones who are typically most predisposed to having financial problems in the first place.

It’s Supposed to Be for Emergencies

Another problem regarding the way some people use payday loans is that they’re not supposed to be used for luxury purchases and other similar expenses. A payday loan is a tool that can get you out of a tough financial situation on short notice, and that’s why it ends up so expensive if you have to prolong its term. If you have access to more traditional loans on the market, you should use those instead for any purchases that you can’t describe as urgent. There’s a surprisingly large number of people who take out payday loans to buy new phones and other gadgets. It should go without saying that they represent a large portion of those with perpetual financial problems too.

The Lender’s Perspective

Look at things from the perspective of the lender. They’re letting people borrow money on short notice, and they need to ensure that they profit in the long run. Defaulting on a payday loan can happen, and the lender is out of a good chunk of money in that case. And when the possibility of dealing with people who are prone to defaulting is higher, the lender has to do something to compensate for the additional projected losses. In the end, it boils down to simple business calculations.


There are also certain regulations regarding the way payday loans are supposed to work. In some areas, there is very strict control over them, and lenders don’t have much freedom in setting the terms of their products. Which is a good thing for you in the end – it means it’s far less likely to end up dealing with a predatory lender who will try to exploit a bad situation in your life for their own personal profit. In tightly regulated markets, the chances of this happening are next to none.

Of course, you still have to keep your eyes open at all times to ensure that you don’t get misled about the conditions of a deal. Sometimes, this will happen without the lender even having any malicious intent – it will simply be the result of you failing to note an important point in the conditions of the loan. You only have yourself to blame in those cases though, and incidents like that should not create a negative association with payday loans in your head. In the end, they’re just a tool. Whether people use that tool correctly is up to them.