Payday loans have many names -- cash advances, signature loans and paycheck loans, etc. Payday lenders provide quick and easy short-term cash to those who need money immediately. That's the big reason why they're so popular.
However, payday loans come at exorbitant costs. This can -- and often does -- lead borrowers into a downward spiral of rapidly escalating debt. Let's look at the issue from various angles to get a complete picture.
First, the pluses. Here's why cash advances may hold enormous appeal for you.
If you're faced with an emergency -- say, unexpected medical bills -- your only consideration might be to get money now. The speed and convenience of a cash advance comes in handy here.
So what are the disadvantages?
The most obvious one -- high costs. A payday loan can cost you say, $15 per two weeks. If you're borrowing only for two weeks, that doesn't sound like much. However, if you calculate the Annual Percentage Rate (APR), you'll see it comes to 391%!
If you don't think that's too much, let me ask you this question. If you invested money in the stock market, what would you consider a good annual rate of return? 20%? Maybe 30%? If you made a 20% return (on average) in stocks year after year, you'd be doing very well indeed. And this is for an investment that's generally considered high risk.
Now compare that with what the payday loan companies charge. You are providing them with a return on their money they likely won't get anywhere else on the planet!
There is another, less obvious reason why payday loans are dangerous. According to some estimates, over 60% of borrowers roll over a payday loan. Many take loans repeatedly, too.
Let's put in some numbers so that you can clearly see what rollovers imply.
Assume you borrow $400 for two weeks at a cost of $15 per $100 per two weeks. At the end of two weeks, you owe them a total of $460.
Let's say you don't repay the $400 at the end of two weeks. Instead, you request a rollover. So you pay them the lending fee of $60 and they agree to roll over the loan for another two weeks. The total cost of the loan at the end of 4 weeks may be as follows:
Original loan amount: $400
Fresh lending fees payable: $60
Late fees payable: $60 (assuming late fees apply at the same rate as lending fees)
Lending fees already paid: $60
Total: $580
At the end of this period (which is 4 weeks from the day you originally took the loan), you decide that you don't have $580 available and so request them to roll the loan over for another two weeks. Then this is what it can cost you in total at the end of 6 weeks:
Original loan amount: $400
Fresh lending fees payable: $60
Late fees payable: $60
Lending fees already paid: $120
Late fees already paid: $60
Total: $700
If you continue this process for six months (more specifically, for 24 weeks), this is what it may cost you in total:
Original loan amount: $400
Fresh lending fees payable: $60
Late fees payable: $60
Lending fees already paid: $660
Late fees already paid: $600
Total: $1780
For an original loan of $400, in a mere 6 months, the payday loan company will collect fees and charges of $1380 from you. That's 3.45 times the amount you borrowed. In APR terms that's 749.5%! If over 60% of borrowers roll over their loans, no wonder many payday loan companies are wildly profitable!
Snowballing costs can easily lead you into a debt trap if you get addicted to payday loans.
So what are the key points to keep in mind when dealing with payday loan companies? Two things:
First, avoid them if at all possible. The best way is, of course, to get your finances fully under control so that you always have cash and / or credit available to meet emergencies.
Second, if you do choose to borrow from payday loan companies, borrow only an amount you're 100% sure you can repay on the due date. If that amount is too low to meet your needs, get additional funding from other sources. Because rolling over cash advances is one of the worst things you can do to yourself.
About the Author
Prakash Menon is a financial expert and writer specializing in managing personal debt and providing wealth building solutions. He has written articles on cash advances, personal debt management and other topics.
The average person some time in their adult lives will... Read More
If you have poor credit or a recent bankruptcy, you... Read More
If you've been tossing around an idea for a small... Read More
The latest IDS figures for unemployment the claimant count measure... Read More
For those in the market for a loan UK ,... Read More
Agriculture loan guaranteesFor better understanding of the agricultural loan guarantee... Read More
A commercial business loan is designed for a wide range... Read More
A college loan has given people all over the United... Read More
Martin graduated of the college with dreams of a highflying... Read More
You might find yourself wondering about the origins of online... Read More
Here are some useful tips on what to consider before... Read More
If you are a homeowner in need of a home... Read More
Need extra cash till payday? It's easy to apply and... Read More
A business loan is designed for a wide range of... Read More
For American students, the U.S. Government came up with a... Read More
The long awaited paycheque is finally here. However, the reverie... Read More
What will it take for you to get a low... Read More
1. Property information. The application begins with a section on... Read More
Here is a useful guide to fast secured loans. Here... Read More
Every unknown road needs a milestone to configure where it... Read More
A Payday loan is a small, short-term, high-rate loan. It... Read More
Sometimes finding fast homeowner loans can seem impossible? no matter... Read More
Car loans for people with bad credit are readily available... Read More
Credit relationships in a social system form an intricate web... Read More
Even it you have no credit history, you can still... Read More
So, you want to get a loan?Here are some simple... Read More
In order to understand qualifications for loan approval, let's examine... Read More
If you're getting in over your head with credit, you... Read More
For those individuals who are looking for fast and inexpensive... Read More
The bad news about attending college is that it costs... Read More
Some say that the automobile industry saved the economy during... Read More
If you find yourself in need of poor credit loans,... Read More
Trying to get a bad credit personal loan can be... Read More
Under the microscope loans for military really are different from... Read More
Are you wondering why choose a personal loan? One of... Read More
Here is a useful guide to bridging loans. This is... Read More
I remember years ago growing up when you needed some... Read More
Here is a useful guide to secured loans. A secured... Read More
A Homeowner Loan is a way of using the equity... Read More
The average person some time in their adult lives will... Read More
At some point in your working life, you may find... Read More
Secured Personal Loans are those loans against which you don't... Read More
You wouldn't consider buying a new pair of shoes, a... Read More
Are you thinking of going in for a payday loan... Read More
Living in the United Kingdom, you might find yourself in... Read More
Plato said, 'We can easily forgive a child who is... Read More
There are many benefits for choosing a Home Owner Loan,... Read More
Applying for a payday loan online is a quick and... Read More
Meeting the requirements to get a decent hotel loan from... Read More
The most important and difficult part in farm mortgage shopping... Read More
A second mortgage is a loan that is secured by... Read More
1. Property information. The application begins with a section on... Read More
A secured loan is any loan that is secured on... Read More
Bad credit is like an ongoing battle for many loan... Read More
A fast cash loan should be an option used as... Read More
Can I Ask my Family for a Loan to Pay... Read More
Albert Einstein called compound interest "the greatest invention of all... Read More
If you want to apply for a loan online, you... Read More
Online car loans enable you to get a good quote... Read More
Your son or daughter is a high school senior and... Read More
If you're looking for a fast homeowner loan, you might... Read More
What are personal loans? They are unsecured loans that a... Read More
Should you find yourself overcome by debt, you might want... Read More
Borrowing money has become more and more popular in the... Read More
What will it take for you to get a low... Read More
Secured homeowner loans come in a variety of different types... Read More
Loan |