A popular solution to cash problems for many people is to use a pay day loan. Payday loan companies are rapidly expanding and seem to offer a valuable service but is it really as good as it seems to be?
While the convenience of being able to get cash right now may out weight the logic of the situation the truth is pay day loan companies are considered predatory lenders. The ways payday loan companies work is basically the same no matter where you are and which company you use. You sign a form that basically makes you an employee of the company and the company advances you cash. In return for this cash advance you promise to repay them from your next paycheck the amount borrowed plus the interest accrued until your payday. If you find that you can not pay the entire amount back on your next pay day you generally have to option to roll your loan by only paying off the interest and a portion of the loan and re-borrowing the amount owed until your next pay day.
The key to a pay day loan is your agreeing to be an employee of the company. By doing this, the lender is not bound by the normal lending rules that apply to a bank. National laws that specify things such as how much interest they can charge, that all interest rates and fees must be disclosed and that interest rates are annual. Banks also can not seize your pay or take other actions against you until they have a filed a small claims action against you and received an order from a court. As an employee who signed away your rights to work for the pay day loan company they can seize your pay, bank accounts or other assets with out having to go to court.
The other key to a pay day loan is the interest rate and service fees. Payday loan companies are expanding rapidly because they generate a large amount of profit from the fees charged. If any interest rates are shown they are based upon a two-week period. If you amortize your loan over a year to determine the real interest rate you will find that payday loan companies are really charge 390 to 851% on their loans with an average of 474%. Of course this rate is obscenely higher than any other loan you could get from any other source and thus should make a pay day loan your last resort if you ever consider it.
While the extremely high interest rates earn a lot of profit for a pay day loan company that isn’t the only way they make money. On average 77% of people who get a pay day loan can not afford to fully repay the loan on their next pay day. This means that they must roll their loan and that means even more profit for the company. When you roll your loan you pay a portion of the existing loan down and then re-borrow the remaining amount of the loan and interest owed. For example if you borrowed $100 you may owe $150 but can only afford to pay $30 on your next pay. The amount paid is applied to the interest rate and you end up borrowing $120, $100 for the actual loan plus $20 of outstanding interest and thus owing $180 on your next pays. As you can see this can add up very quickly.
Payday loan companies deliver a fast and convenient loan to you when you need it the most but at a very high cost. If you find yourself in a cash emergency you should consider any option available to you before using a payday loan company. If you are forced to use a pay day loan company ensure that you repay the full amount as quickly as possible to avoid repaying much more money than you perhaps expected.