You have seen them on the corner and in the poorer parts of town with names like “Quick Cash”, “Quick Loan”, “Payday Loans”, “Car Title Loans”. They are starting to sprout up all over the country and will soon rival Starbucks for sheer number of locations.
They are the new trend in predatory lending practices but still manage to fly under the radar of regulation in most states. They don’ t charge interest, they charge a “fee”.
But it sounds like the ultimate in convenience. Need some quick cash – stop by and in just five minutes you can be out the door with $100, $500 even $1000 dollars. But what is the true cost of this “convenience”?
How It Works
A cash advance or payday/paycheck loan is usually secured by a personal check. Some companies want your bank account or credit card information in addition to or instead of a check.
You write a check to be cashed or agree to have an amount withdrawn from your bank account sometime in the future; usually 14 days (the standard payroll period).
After completing the agreement/contract you are given an amount that is less than what you have agreed to pay. The difference is the “fee” for the loan service. And you have got your cash!
Why It Works
Why is the company willing to loan you money like this? Simple, because loaning out money for these “fees” really amounts to a huge profit at your expense.
For example, say you borrow $200 and the lender charges a “fee” $15 for each $100. Within 14 days you will have to pay $230 for borrowing $200. Now if the $200 keeps you from having to pay a $100 late fee or penalty on something it is probably worth it. But if you just want the money today, you are paying a high price.
You are paying 15% interest for a 14 day loan. That amounts to 3785% compounded interest yearly! No wonder lenders are happy to loan you this money. If they loan you $100 and you pay them back with an extra $15 in two weeks and they loan out the $100 again along with the $15 extra you paid, and they keep doing this for one year, they will turn their $100 into $3785 by the end of the year!
Maybe you should be loaning your money to them rather than borrowing from them.
What To Watch Out For
- Early repayment fees. Pay off your loan early and they sock you with another fee.
- Late repayment fees. You may have to pay the entire fee again if you miss the payment date.
- “Membership” fees. Some companies charge you to become their customer along with charging you as their customer.
- Giving lenders access to directly debit your bank account. Just hand them your wallet, it’s quicker.
- Fine print (as in all contracts). Know what you are signing or don’t sign it.
- Bounced check or debit fees. Make sure you have money in your bank account or you get to pay your bank a fee as well.
- “Collateral” requirements such as a car title. Miss your payment and you may be missing your car – permanently.
There Is A Better Way
The root problem here could be that you are getting strangled by your debt payments. Credit cards, store accounts, installment payments and such can eat up your income quickly. Ite may be time to visit a non-profit credit counseling service or create a debt reduction plan for yourself.
Or it could be that you are just spending more than you make. You may need to spend a few minutes each week and write down your expenses. Then categorize and total them to see where your money is going. Then record your income for the same time period and make sure that you are not spending more than you make.
Sure, everyone gets behind occasionally. But you need enough room in your budget (this means spending less than what you make) to accommodate the “budget busters” and surprise expenses that may come up. It may mean cutting back on cable, magazine subscriptions or eating out. But last time I checked, McDonalds did not charge a $15 “fee” for making your food.
About the author
© Simple Joe, Inc.
David Berky is president of Simple Joe, Inc. a marketing company that sells simple software under the brand name of Simple Joe. One of Simple Joe’s best selling products is Simple Joe’s Money Tools – a collection of 14 personal finance and investment calculators. This article may be freely distributed so long as the copyright, author’s information and an active link (where possible) are included.