Surviving Unexpected Financial Problems In Today’s Credit Market

Posted by Rana & filed under General Debt & Loan Consolidation Information.

As the new millennium progresses, it seems that the cost of everything is on the rise.  As a result, more people are utilizing credit cards to pay for miscellaneous items.  Using credit cards allows borrowers to pay their debts in increments instead of trying to tackle larger purchases with cash. However, for those who only need to borrow a small amount for a short period of time, payday advance loans may provide a better solution.

Payday cash advance loans can be a cheap and fast way to solve an unexpected financial problem.  There is no application fee, and once the lender has approved the loan, the money is deposited into the borrower’s checking account that same day.  However, there may be facets of the payday loan process that average borrowers are unaware.  It is always advisable to have a clear understanding of any loan contract before agreeing to its terms.

Most payday loan companies rely solely on finance charges for their source of income. A contract from any genuine payday lender will state their charges, in total dollar amount as well as in the form of an Annual Percentage Rate (APR).

A payday loan rate is not technically of the low-interest variety; however, if the payday loan is repaid promptly, it can still be a cheap answer to a temporary monetary problem.  Instead of looking at this fee in terms of the APR, it may be helpful to see the total fee amount you will actually have to pay in dollar form.

For example, suppose a borrower needs $100 to settle an immediate financial debt.  The payday loan lender makes all loans on a bi-weekly basis; therefore, borrowers take out loans for a two-week period.  That $100 loan will be charged a loan fee for the loan’s term of 14 days.   The total cost of this two-week loan is $15.  This means that the borrower will repay the lender a total of $115.  When considered in these terms of how this immediate infusion of cash could help the borrower navigate an immediate cash shortfall, the payday loan actually offers a low-cost fee. 

Paying the loan fee on a payday loan may be preferable to paying the late charges a borrower could incur should they pay their bills late.  For example, if a consumer borrows $100 via a payday loan to pay a credit card bill, he will most likely end up paying $15 for the service.  On the other hand, should this borrower skip their monthly credit card payment, he would be charged $25 for the late payment fee and he might see his credit card’s interest rate increased.  This fee is much higher than what the borrower would have had to pay for the payday loan.  Additionally, a late payment on a credit card could have a negative impact on the borrower’s credit rating.  In this scenario, if you compare the cost of the loan to the costs of not getting the payday loan, then the payday loan is a very useful financial tool.

However, it is important to understand that the cost associated with a payday advance loan is based on a two-week loan.  This means that if the borrower is late in repayment of the debt, the loan and its attached fee will be refinanced at the current fee structure. 

Again, consider the above example of a $100 loan.  The payday loan rate charged to a borrower who repays their debt on time is $15.  However, if this amount is not paid by the maturity date, the debt will “roll over” into a new loan.  If this $100 loan were rolled over three times, the fees charged on this loan would have increased to $60.  To pay $160 for a $100 loan doesn’t make much sense. 

As a rule, it is never a good financial decision to pay any bill past its due date.  Believe it or not, many lenders have said that they make more money off of late payment fees than they do servicing the actual loans.  Payday advance loans are not the answer to every financial difficulty, but they are a fast, easy, and cheap way to help a person out of a temporary monetary shortfall. 

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