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Odds are good that if you create a financial plan
today, reduce your debt and begin saving regularly,
you may be able to live more comfortably, with less
worry and maybe even retire as a millionaire. Set
some realistic goals about how you would like to
live now and in the future. Begin learning about
how to manage your money better, and develop a financial
plan that will help you achieve your goals - even
if you're living paycheck to paycheck.
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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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