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Should You Ever Take a Payday Loan?by Prakash Menon
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.
You can have bad credit and still qualify for a payday loan. In most
cases, no credit check is conducted. The process is fast -- it can take as
little as 20 minutes to complete. Some lender even claim to target approvals in
30 seconds!
There are no upfront costs -- so the buy-now-pay-later
convenience applies here as well. You can apply in person at a local outlet,
over the phone or over the Internet. You get funds deposited into your bank
account in 24 hours.
Compared to some other sources for cash, payday
loans are discreet -- no one else needs to know about it. The transactions are
secure -- your financial information remains private.
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 won't get in too many other avenues.
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 extremely 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 (and other high cost borrowings)
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
short term cash loans, personal debt management and other topics. See http://www.payday-cashadvances.net/paydayloan.html for alternatives to payday loans.
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