Home > Payday Loans > Payday Loans: Higher Interest Rates Can Dupe You
Payday Loans: Higher Interest Rates Can Dupe You |
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These companies dealing in payday loans have a very simple business whereby they lend you money until your next paycheck. The arrangement is quite simple, easy and convenient in which you are required to give the payday loans company a post dated check. This check includes the amount you have borrowed plus the interest you will be paying on it. The payday loans company will then cash the check on your next payday and your loan will be paid off accordingly. In most cases, people taking payday loans services do not realize that the interest rates charged by these firms are quite substantial and often reach the equivalent of as high as four hundred percent per year. Therefore, the one thing to consider when looking for payday loans is the APR or annual percentage rate that these loans carry. At a glance, it may seem that you are paying back $240 for a loan of $200 for two weeks, which seems to be a nice deal. But the APR of this loan comes to be a whopping 520%. That is the amount this loan would cost if played over a period of one year. If you compare it with a high interest credit card of 29%, you will realize that it is not as good a bargain as it seemed to be. The interest rates charged by payday loans companies vary from state to state, and even a rate of 15-17% for two weeks is not unusual. This translates to approximately 390-440% per year, which is an exorbitant amount of money to pay as interest on a loan. Lenders usually try to justify these high interest rates for payday loans by calling these rates fair and necessary to cover the overhead expenses associated with running a business and to account for a substantial number of borrowers failing to repay their loans. It probably is true but an interest rate as high as this can actually transform the payday loans into a burden for consumers instead of a convenience. Many borrowers taking payday loans are low paid blue-collar workers who basically make a living from one paycheck to the next paycheck. They usually find themselves in a financial crisis quite often and thus seek help in the form of payday loans. But the problem with payday loans is that if they fail to pay back the loans on time, the interest continues to accrue. Also additional penalties such as returned check fees might apply at the same time. It is quite common for small loans of $300 or so turning into debts of several thousand dollars. This is quite common if the borrower compounds the problem by borrowing funds from a second payday loans company to pay the loan from the first lender. A number of states have already passed laws capping the interest rates that are applicable for payday loans. A good alternative to the payday loans would be to take a cash advance on a credit card. There is usually a fee associated with a cash advance, but the annual interest rate, combined with the fee, still turns out to be a lot cheaper than a loan at 400%. It is important to read the terms and conditions carefully before taking payday loans as ignorance can really play havoc with your financial life. While considering payday loans, the first thing to look for is the APR. Federal law has made it mandatory for every lender to disclose the cost of any money borrowed through a Truth in Lending Disclosure. This must break down the cost by APR (annual percentage rate). Another important thing to look for while taking up payday loans is the length of the term. If two companies charge the same rate for every hundred dollars borrowed but one company has a term of up to four weeks and the other company has a term of two weeks, then you must consider the first company and take advantage of the extra four weeks. The APR of the first Company would be half of the APR of the second company. The reason for this difference in the length of the term is that sometimes they base APR on a fixed amount of time (two-three weeks usually). On close scrutiny, you will realize that the fee charge is fixed but it may allow you to pay it back in a longer term such as four weeks. To avoid taking such high interest loans like payday loans, you should plan your budget practically and in accordance with your income. You could develop a habit of saving certain amount of money from your paycheck every time you get it. Before taking a payday loan cash advance, you should look around for a loan from a friend or relative, as they will not take any interest for lending the money to you. |
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