You're sure to have seen signs like Quick Cash, Quick Loans, Payday Loans and Car Title Loans around town. Rapidly sprouting up nation-wide, they are likely to soon rival Starbucks for the number of locations.
The latest trend in predatory lending practices, quick loans manage to escape regulation in most states. There is no interest, only a fee. It can sound like the ultimate in convenience. For quick cash, just stop by and walk out in five minutes with $100 to $1000. But there's more to the true cost of the convenience.
How It Works
Cash advance or payday loan or paycheck loan usually involves a personal check. Some require your bank account or credit card information in addition or in place of a check. You give a check to cash or agree to let the amount be withdrawn from your account in the future, usually 14 days, which is the standard. On completion of the agreement or contract, you get an amount less than the agreed loan amount. This is the fee for the service. But you have your cash.
Why It Works
The company's willingness to loan you this money is due to the fees, amounting to a huge profit at your expense. For instance, to borrow $200, the lender charges a fee of $15 per $100. In 14 days you owe $230 for borrowing $200. If this $200 can save you $100 in late fee or penalty, it could be worth it. But for money for one day, it's a high price to pay.
For a 14 day loan, the interest in 15%. In compounded annual interest, it comes to 3785%. This explains lenders' willingness to loan you money. For a loan of $100, you pay back an extra $15 in two weeks and they again loan out the $100 with the extra $15. Doing this for one year turns their $100 into $3785 by the year-end. It's enough to make you want to loan your money to them instead of the other way round.
What To Watch Out For
Early repayment fees are charged when you pay off your loan early. If you miss the payment date, there is a late repayment fee. Sometimes there are membership fees as well.
Give lenders direct debit access to your bank account. Handing over your wallet is quicker. Don't sign any contract if you haven't read the fine print. Bounced check or debit fees are the reason you should ensure that there is money in your bank account. Collateral could be a car title. If you miss a payment, you may lose your car for good.
There Is A Better Way
The main problem maybe getting strangled by debt payments. Credit cards, store accounts, and installments can quickly deplete your income. A visit to a non-profit credit counseling service or a self-created debt reduction plan may be necessary.
It could also be that you spend more than you earn. Spend a few moments every week to note down your expenses. Categorize and add them to determine where your money is going. Record your income for the same duration to make sure that your expenses doesn't exceed your income.
Everybody falls behind occasionally. But make sure there's enough in your budget, which means less expenditure than income, to accommodate budget busters and surprise expenses that crop up. Cut back on cable, magazine subscriptions or eating out if necessary. However not all services charge a $15 fee for catering to you.
