Costs of a Payday Loan
We’ve all seen them before: supposed consumer interest groups that are quick to offer harsh, often untrue criticism of payday loan and cash advance lenders.
One of the most often used, yet utterly deceptive, gimmicks these cash advance watchdogs use is to warn consumers of the ’sky-high’ APR’s of payday loans. What they neglect to mention is that unlike credit cards, mortgages or car loans, cash advances are designed to be short-term solutions to cash flow problems. Viewing payday loan fees as an annual APR offers a distorted picture of what are comparatively small fees in regard to the amount of the loan and the repayment period, which is usually two to four weeks.
In reality, cash advances, used as a short-term solution, have much lower APR’s than other less-than-responsible ways of dealing with money needs.
In comparison, when expressed as APRs for two-week terms:
* $100 pawn loan with 20% service fee= 240% APR;
* $100 payday advance with $15 fee= 391% APR;
* $100 bounced check with $48 NSF/merchant fees = 1,251% APR;
* $100 credit card balance with $26 late fee = 678% APR;
* $100 utility bill with $50 late/reconnect fees = 1,304% APR.
As always, it is important to see the whole picture. Payday loan borrowing coupled with a reasonable and timely repayment plan is a responsible way to deal with everyday cash flow dilemmas. Luckily most payday loan customers can look past misleading advertising and are able to make smart, responsible financial decisions for themselves.
