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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. Thats the big reason why theyre so popular.
However, payday loans come at exorbitant costs. This can — and often does — lead borrowers into a downward spiral of rapidly escalating debt. Lets look at the issue from various angles to get a complete picture.
First, the pluses. Heres 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 takes as little as 20 minutes to complete. You can even find lenders who target approvals in 30 seconds! There are no upfront costs — so the buy-now-pay-later mentality can find full expression. 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 youre 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 youre borrowing only for two weeks, that doesnt sound like much. However, if you calculate the Annual Percentage Rate (APR), youll see it comes to 391%!
If you dont think thats 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, youd be doing very well indeed. And this is for an investment thats 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 wont 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.
Lets 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.
Lets say you dont 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 dont 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. Thats 3.45 times the amount you borrowed. In APR terms thats 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 youre 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.
Article Source: EzineArticles.com