Usually the loan with the highest APR, payday loans are designed to be short-term loans to cover a borrower’s urgent expenses. These loans are usually of very small value, from a couple hundred to a couple thousand dollars with very short terms (a few weeks).The fact that terms are short and loan amounts small gives lenders great flexibility to charge ultra high interest rates without people really noticing. For example, if you were the borrowing $200 for 2 weeks, charging $30 would not seem like much. However, this means a 400 percent annualized loan. This is compared to a credit loan that typically charges 18% and mortgages which charges 6.5% these days.
Typical Scenario for a Person Taking Payday Loans
A person (We will call him 082 since he joined the agency after 007) wanted to buy an iPhone but his payday was in 2 weeks. Since he maxed out all his credit cards, he turned to take a payday loan. He borrowed $750 since he wanted the 8GB version as well as a car charger and a nice phone case. He writes a post-dated check for $860 so he can repay the loan when his paycheck comes in. He happily buys the iPhone, uses it for 2 weeks. At this time, 082 can either cash the check and pay the loan off, or renew the loan (technically called “flip the loan”) by paying the $860 and taking another loan for $750, which extends the loan for another 2 weeks. 082 chooses to extend the loan since he wanted the $750 dollars to buy his starbucks coffee.
In the above scenario, 082 paid $110 dollars from his initial loan and another $110 for his extension. In essence, he is paying $220 to borrow $750.
Who should even attempt to look at payday loans?
For most people, there are many different ways to borrow money that will carry a cheaper borrowing cost than payday loans. When I first came to work in the states after graduating from college in Canada, I had absolutely no credit history. I remember not being able to get a cell phone without putting down a $500 deposit. I couldn’t get a credit card either because of the same reason. I was fortunate because I had some money, but those that did not might look into this option for the first week or two until they get paid.
This is only feasible if you know you are responsible to pay it off as soon as you establish some money from your work. Otherwise, you end up paying ultra high interest which just does not make sense.
I’m sure there are other very specific situations like the one I mentioned where payday loans make sense, but for the vast majority of us (99.9999% of the population), avoid payday loans like a plague.
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{ 4 comments… read them below or add one }
I’ve never thought I’d ever use a payday loan place. Then a few years back, I found myself without any credit cards, and no money for gas to go to work. Thankfully, my parents helped me out, but it did put in my head, why I needed credit for the shortterm, but a savings and spendings plan for the long term. Yet their commercicals try and get you to treat them like a bank and that are very much, not a bank.
Eric: These loans are definitely a very bad place to be if you are looking to use it like a bank. For some strange and emergency situations though, they might be useful but it involves very careful consideration.
Ya moneyning what you have said is right. One can make use of payday loans when he is in emergency needs. Moreover one can go for a payday loan, when he is able to make a good profit out it i.e, more than the interest what he is going to pay. But before going for a payday loan one must make a clear research on it and the companies offering. One must make sure that he pays back the loan as early as possible.
Payday loans are great if they are not abused by the borrower. A payday loan company will not break your thumbs if you miss a payment!