With commercials advertising the benefits of payday loans and debates focusing on the high interest rates, it is hard to determine if taking out a loan through a cash advance lender is worth it. The problem is that when you look at the APR of various lenders, it appears that payday loan fees are higher than average. What borrowers need to look at is the length of the loan, the benefits of the type of loan and the stipulations that come with borrowing money. In order to sort out some confusion an explanation of the numbers is needed.
The term “Annual Percentage Rate” (APR) refers to the cost of a loan, in a percentage. The amount of a loan will include the money you borrow as well as the interest rate; however many lenders include other fees in the APR. As with industry specific loans such as mortgage or auto, there are several additional expenses that go into your loan, in addition to the amount borrowed. This means that to understand what you are paying for you must know your loan inside and out. This is certainly good advice in general, but for the purposes of this discussion, keep in mind the time it takes to research every figure and industry term within your loan.
When calculating your APR you must factor in the length of the loan. The longer the terms of your loan, meaning the time you have to repay, the smaller the APR will seem. The same is true for the opposite – if the loan is short-term, the APR will be higher. It is important to remember that APR refers to an annual percentage. A two week loan will have a much higher Annual Percentage Rate than, for example, a two year loan. Payday loans offer the borrow money that must be paid back within two, sometimes four weeks. The typical fee for a $100 loan is $15. This has received a lot of negative attention, because when you calculate the APR of this two week loan, it comes out to approximately 390%. Shocking. However when you consider that borrows have several years to pay off other loans, where the APR may be 21%, for example, then the balance is thrown off.
Payday lenders did not set out to provide long term loans to people in the way that banks do. Instead the intention is to offer a one time, short term loan for unexpected costs or emergencies. Payday loans are beneficial to people who need to receive help quickly without their credit score damaging their changes. Rather than needing a near perfect credit score, payday loan borrows simply need to have a job, a bank account and a few references. Comparing the Annual Percentage Rate of these vastly different lenders is very confusing to borrowers. Paying $345 to borrow $300 for two weeks, with no collateral and few limitations, is not a rip off, but rather a helpful option for those who find themselves in need.
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