The costs of a payday loan
A payday loan can be an option if you find yourself in need of cash for the short-term. Perhaps you have an unexpected bill or your car breaks down (jeopardizing your commute to work) and you must have cash quickly. A payday loan is a fast, easy and simple way to gain access to cash. But borrowers of this type of loan need to understand what they will really be paying. Payday loans are a very expensive form of credit. Borrowers should understand that they are paying for the convenience and immediate access to instant cash. Most financial experts recommend using this type of loan only in the short-term for an immediate need and caution borrowers to be wary of repeat loans. So before you take out a payday loan you should understand exactly what a payday loan is and what the costs are.
What exactly is a payday loan?
Payday loans can go by a variety of names, including "deferred presentments", "cash advances", deferred deposits", or "check loans", but basically they all work in the same way. The borrower writes a check to the lender. The amount on the check equals the amount borrowed plus a fee that is either a percentage of the full amount of the check or sometimes a flat dollar amount. Some payday lenders offer an alternative "automatic debit" agreement. Borrowers who sign this agreement give the lender permission to automatically debit the customer's account at a future date. These automatic debit arrangements, in particular, are often marketed to those with fixed incomes like public assistance recipients and Social Security recipients. The check (or debit agreement) is then held for up to a month, (usually until the customer's next payday or until receipt of a government check).The payday loan is for an amount of cash that is less than the amount that has been written on the check. At the end of the agreed time period, the borrower must either pay back the full amount of the check (more than the amount of the loan), allow the check to be cashed, or pay another fee to extend the loan(this is called rolling over).
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Why people use payday loans
Many times consumers are unaware of the less expensive options that are available instead of a payday loan. Even relatively high-cost credit card debt is only a fraction of the cost of a payday loan, and conventional short-term bank loans, such as through a revolving line of credit or even overdraft protection on a current account, are far less expensive. And sometimes people do not understand how much they are really paying as surveys have found that many people believe their payday loan was actually much less than it really was. In addition many people willingly paying the high cost of payday loans because they perceive (rightly or not) that they do not have access to traditional banking services. Coupling consumer's unwillingness to explore the options with the current financial situation which is causing lenders to look even harder at potential clients does not help either. This has led many people who have less than stellar credit to turn to payday loans for fast cash. Because of the lack of required credit check this has led to these loans being called bad credit payday loans.
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Ways to get cash fast:
If you need cash quickly you may be thinking that a payday loan is the right option. Payday loans are easy to apply for, simple to give and best of all instant access to cash. The downside to getting a payday loan is the high costs. Payday loans typically carry the highest interest rates and many lenders charge several different fees. Keep in mind that you are paying these high rates due to the convenience and instant access that getting a payday loan carries with it. But if you have decided that the cost of a payday loan is too high there are other cheaper options you should consider-
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Why payday loan are expensive
How much does it really cost to borrow money from a payday lender? Many companies will quote the cost of loans as the cost to borrow $100, such as $15 per $100 or $20 per $100. The problem lies in the fact that since the loan must be paid in a week or two, consumers may not realize how much the payday loan cost under typical use. Prospective borrowers can find multiple sites online that offer a free calculator to help you determine how much your payday loan will really cost. You simply type in the amount you want to borrow and the stated interest rates and/or fees. The calculator will then give you the actual interest rate that you would be paying if you decide to take out the loan. This can be very helpful in gaining a realistic picture of what this type of credit really costs.
Payday loan terms
Payday loans will typically range in size from $100 to $1,000(usually no more than $1500 dollars), depending on state legal maximums. The average loan term in most states is two-weeks. Loans will typically cost on average 470% annual interest (APR). The finance charge will then range from $15 to $30 to borrow $100. For two-week loans, these finance charges can result in interest rates from anywhere between 390 to 780% APR. It is also important to keep in mind that shorter term loans have even higher APRs.
Cost Compared with Other Cash Loans
The bottom line is that payday loans are extremely expensive compared to other cash loans. For example: a $300 cash advance on the average credit card, repaid in one month, would cost $13.99 finance charge and an annual interest rate of almost 57%. By comparison, a payday loan costing $17.50 per $100 for the same $300 would cost $105 if renewed one time or an astounding 426% annual interest. Despite the costs research has show that the number of payday loans being taken out by consumers has increased by almost 55 per cent over the last year. One recent survey has found that the rise in cost of utility bills and food has seen payday loans become a more popular option for borrowers in need of short-term credit. While there is no disputing that payday loans are expensive financial experts warn that such forms of credit are only beneficial if the loan is for a short period of time and have advised consumers to borrow from family members if the money is needed over a longer period of time. The reality is however that as disposable income is being squeezed through increases in the cost of food, fuel, utilities and general living necessities, these loans are increasingly used to help those on a tight budget. Borrowers are urged to regard them as a bit like a taxi-only convenient for short-term journeys.
How to lower the costs of your payday loan
It is important for borrowers to understand that not all payday loans are equal. You can shop around for the lowest interest rate. Even with this higher rate different lenders will offer different rates of interest. In order to secure the best payday loan you will want to choose a lender that offers the lowest rate and maximum time to repay the loan. This can also be beneficial for you in future because if you decide to roll over your loan repayment, a high interest rate will lead to a higher fee amount being built up on your existing payback amount. And of course a lower interest rate will keep the total costs of the payday loan much more affordable. And of course look at your payday loan only as one-time occurrence to solve an immediate problem. Discipline yourself and budget the money to pay your payday loan off and avoid the temptation to "roll over" the loan. If you do these steps you can lower the overall cost of your payday loan.
Abuses in Payday Lending
Abuses are rampant in making and collecting payday loans. These abuses occur in a variety of ways. Cash-strapped customers are often unable to repay the entire loan when payday arrives, because they need the new paycheck for current living expenses. Lenders then encourage these customers to rollover or refinance one payday loan with another; those who do so pay yet another round of charges and fees and obtain no additional cash in return. In addition if the check is returned for insufficient funds or the loan otherwise goes unpaid, the lender may threaten to involve the criminal justice system, a tactic that is possible only because a check,(rather than a mere promissory note) is involved.
Reining in payday loan lenders
State governments are now responding with legislation in the area of payday loan lending which has to this point been largely unregulated. Because of the public outcry over the costs of payday loans some states have enacted legislation that will rein in what payday lenders can and cannot do. For the first time for some lenders they will have to be licensed, undergo a criminal record check and post their charges and fees prominently in their offices. And in some places they will not be allowed to garnishee wages or make more than one loan at a time to a customer. In addition some states are enacting ceiling rates that put a limit on what payday lenders are allowed to charge for short-term loans. Financial experts are hopeful that this type of legislation will help promote fairer lending and cut down on abuses that have happened. Conversely, lenders say that such high rates are needed on the basis that these are short-term loans to relatively high-risk customers and are expensive to provide. Financial experts counter with the statement that with regulation most people who have other options will look elsewhere.
