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Pay Day Loan
The pay day loan has certainly gotten its share of bad press in the last year or so. According to one, widespread line of thinking, it is simply another way that “predatory lenders” take advantage of poor, ignorant working people. Proponents counter that it is one of the few kinds of loans that people with bad credit can get. What’s the real story?
In this case, the reality is somewhere in the middle, although the term “predatory lender” is, on its face, pejorative. Consumer reporters and progressive legislators will argue that the pay day loan has extremely high interest, despite the fact that most states now control interest rates for banks and other financial institutions. Again, proponents counter, correctly, that the higher interest rates offset the amount of bad debt attributable to non-payers.
Extreme, but needed
The fact is, some people would have no credit at all were it not for the pay day loan. The cost, admittedly, is high, but this is a function of the consumer’s previous credit history, not an assessment made independently by the pay day lender. A person with a steady employment history, a decent record of debt repayment and a current car loan or mortgage will rarely have to avail himself of this kind of high-cost loan.
For the marginal credit risk, the $10 to $30 fee per hundred dollars borrowed, over a two-week term, results in a very high rate. A $100 pay day loan with a $20 fee, about the average, equates to a 520% APR (Annual Percentage Rate). This dwarfs even the rate charged by pawnshops, which brings up another salient point.
Assets or income?
It would be less costly, if a consumer needed a very short-term (less than a month) loan, to pawn some jewelry. Even with the cash advance fees and the higher interest rate for cash as opposed to purchases, most credit cards also offer a better deal for a short-term loan than the pay day loan. Of course, all of this assumes that the consumer has assets.
Consumers who have no assets can only “bank” on their employment and income. When the average $100 bounced check costs an average of $48 in fees, that translates to an APR of 1,251%, and if you pay your $100 credit card balance even one day late, the $26 (average) late fee amounts to 678% APR. There are a lot of ways that consumers can overpay on interest charges, and pay day loans are not unique.
As with any high-cost service or product, you should carefully consider your options before taking a pay day loan. Some people get into a vicious circle of refinancing the same loan over and over without ever paying it off completely, and this is the last thing you want to have happen if you are trying to establish new, responsible financial habits. A pay day loan, like anything else, can be used correctly, misused or even abused, so it is incumbent on you to educate yourself on the subject so you can make an intelligent, informed decision.
Topics: Payday Loans |
