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Payday Loans: Quick Trouble
You’ve seen the advertisements on just about any television channel if you’ve watched programming
for more than a half hour. Quick money, easy payday cash, money overnight, low costs fast cash,
and money in your pocket with one phone call. Quick cash loans go by a number of names today but
they all boil down to the same thing: fast, limited liquidity provided at a high price.
Payday Loans and What They Are
Among quick cash loans, payday loans are the most notorious. They involve small, short-term loans
for a very short period of time, usually 30 days at most, and they cost both a fee and a high interest
rate. In short, the customer gets billed twice. But this is to cover the lender for their risk in providing
what amounts to be a completely unsecured loan with little promise of payback.
Mechanically, the borrower goes in and applies for the short-term loan. He or she then fills out a
personal check for the amount borrowed. This check is payable on the date the loan comes due if
approved. The payday lender holds the check and agrees not to cash it until that date, the
assumption being the funds borrowed will be covered by the next
paycheck of the borrower.
The fees involved add on top of the interest charged for the payday
loan itself. So the payday loan lender profits multiple times. The fees
are calculated by percentage which means that for however much the
total amount borrowed equals, the fee is a percentage of that total on
top of the money that needs to be paid back by the borrower.
You borrow $1,000. The fee could be 15%. The interest for 30 days
would be 15%.
When payment is due you will pay back $1,000 plus a $150 fee, plus $150 in interest. The total due
will equal $1,300. The added catch is the option to extend the quick cash loan if desired.
The payday lender doesn’t necessarily want their money back right away if you the borrower are
willing to pay more fees to carryover the loan for another 15 to 30 days. It just means more profit for
the lender. And this rollover becomes a 2nd fee on top of the 1st application fee and interest. As you
can see, the costs add up quickly for a quick cash loan.
But how much of cost is a fee really if you need cash right away? Isn’t it a necessary evil for the
bigger goal? Yes and no. There are other ways to raise just as much in financing, and although a
minor fee in itself doesn’t sound overbearing, statistics support the argument that payday loan
borrowers ultimately end up paying almost 400% to 900% the original value of the loan!
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