Payday loans can be difficult to understand, and the costs associated with them can be incredibly burdensome. Prior to obtaining a payday loan, you should try to understand as much as possible about what you are actually going to be on the hook for. Here is an example of what potential costs could look like in Colorado:
There are three allowable costs in Colorado
• Finance Charges
• Interest Charges
• Maintenance Charges
Using the maximum loan amount of $500 and the minimum term of 6 months, potential costs could look like this:
1. Finance Charges can equal up to 20% of the first $300 and an additional 7.5% of the remaining $200. These are automatically earned on the date of the transaction.
$300 x 20% = $60
$200 x 7.5% = $15
This gives us $75 in finance charges
2. Interest Charges may also be charged at 45% per year for each loan; the charge is only applicable to the amount borrowed, and not any additional fees.
$500 x 45% = $225
$225 / 2 = $112.50 [if compounded annually]
This gives us $112.50 in interest charges.
3. Maintenance Charges of $7.50 per $100 borrowed is also allowed and only charged after the first month.
$7.50 x 5 = $37.50
There is a limit of $30/month
$30 x 5 = $150
These charges do not start until the second month
This gives us $150 in maintenance charges
The maximum cost allowable under Colorado law breaks down as follows:
$75 – Initial finance charges
$112.50 – Interest charges
$150 – Maintenance charges
This gives a total cost of $337.50 for borrowing $500 for six months!!
This amounts to roughly 630%!!
This means that in order to borrow $500, you will ultimately need to pay back $837.50. This is exactly why it is so important to know what you are on the hook for. The high cost can drive you into a cycle of needing a payday loan in order to pay off your previous payday loan.