Most towns have numerous small shops that offer what are known as payday loans or cash advance loans. These stores are normally found in strip malls and occasionally, depending on state laws, they double as pawn shops. Their business model is a basic one – they lend cash to individuals who need some cash to tide them over until their next paycheck. The technique is handy and simple to use; you walk in, show identification, and write a postdated check for the sum you wish to borrow plus interest. On your following payday, the business cashes the check you have written and your loan is paid in full.
This seems like a good idea – helping individuals get to their next paycheck by lending them some dollars in the meantime in the form of a short-term cash loan. What’s the problem? The problem is that few people realize just how expensive it can be to borrow money in this manner. The rates of interest charged by these companies are generally shocking, and can reach the equivalent of more than 400% per year!
The rates of interest that quick cash loan stores are permitted to charge vary from state to state, but a typical rate for a two-week loan might be 15-17%. That does not seem like much if you are borrowing $100 and writing a check for $115; but the annual rate of interest on such a loan is really 390%, which makes it perhaps the most pricey way to borrow money. The joke in the business is that it would actually be cheaper to borrow from a loan shark than from one of these legitimate businesses. The lenders defend these rates, pointing out that such fees are necessary to safeguard their business overhead and high default rate. That may be true, but a lot of borrowers are blue collar workers who live from paycheck to paycheck. It is simple to fall into the trap of repeatedly making use of such loans, and the interest adds up in a hurry, tuning a convenience into a nightmare. Someone who is “short” this week may also be short in fourteen days, and a loan of a few hundred dollars can swiftly turn into a debt of a few thousand dollars, particularly when late charges and bounced check fees are added to the total. More than a few consumers at such businesses have had to resort to personal bankruptcy in order to get out from under their mountain of cash advance loan debt.
Much more egregious is the fact that such loan stores are regularly located near military bases. Our military personnel aren’t well paid and some members of Congress aren’t pleased that these predatory businesses are setting up shop for the purpose of exploiting our men and women in uniform. Several states have already passed laws that place limits on the interest rates that such businesses may charge and others will undoubtedly follow. A more suitable alternative for anyone with a short term cash shortage could be to take out a bank card loan or a home equity line of credit instead. There is typically a small fee associated with such a loan, but the rates of interest, which are probably no more than 30% , are far more affordable than the 400% per year charged by the payday financial institution.
Anyone considering a quick cash loan should read the terms of the agreement carefully. Otherwise, that short term loan could possibly haunt you for years.
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