Macroint

Counting The Cost of a Payday Advance Loan

With the recent volatility of the economy in the United States, many Americans have found themselves in an unsteady financial position. All over the country, thousands of families struggle to put food on the table, gas in their cars and clothes on their childrenís backs. Unemployment rates are still above average and plenty of individuals are not making the same kind of money they were years ago. Unfortunately, many people make poor decisions when it comes to money, and one of the poorest choices a family can make is taking out a payday advance loan.

A payday loan, also referred to a cash advance, is a short-term loan made to struggling individuals who need assistance making ends meet. Essentially, a customer is granted a loan, generally ranging from $100 to $1,000 at most, for a period of several weeks to a month. While conventional loans require credit and background checks, payday advance companies generally do not take these factors into account. To secure a loan, all a customer needs to do is bring a form of identification and proof of income. Some companies offer prepaid debit cards and check cashing services to further entice individuals. While the idea of providing loans to people in need seems like a kind gesture, the reality is anything but nice.

Cash advances, while helpful in theory, are far more harmful than beneficial. Payday loans generally carry very high interest rates and come with heavy fees. While a conventional annual interest rate for a car loan or student loan tends to range from 3% to 10% depending on loan type and credit score, payday loans have an annual percentage rate, or APR, of 400% to 700%. A $1000 loan with an APR of 400% is equal to over $10 a day in accumulated interest. This rate is shocking and can lead to hundreds of dollars in interest owed on top of the premium. Aside from the interest rate, most cash advance companies also charge $10 to $50 in fees just to secure the loan itself. For a small loan, some customers will end up paying close to double the amount borrowed by the time the loan is repaid in full. If the loan isnít repaid on time, the interest rate and fees continue to accrue, often at a higher rate than before.

For the most desperate customers, the fees and interest charges associated with cash advances donít even highlight the worst cost. Unfortunately, taking out short loans with high interest rates can create a vicious circle. An individual will take out an advance on a paycheck but will be unable to pay back the loan. Consequently, this will often lead to further cash advances to cover past loans and mounting piles of debt to repay.

Unfortunately, despite the obvious and costly shortcomings of payday loans, they are still very popular with people who have a hard time covering their monthly bills. No matter how desperate situations become, the expenses of cash advances supersede the advantages.