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Payday Loan Companies - Are Their Rates Too High?
Payday loan companies do provide cash at higher rates than other
types of credit programs. But these rates are for short periods,
so fees are often small. While payday loans are not for every
credit situation, they can help during a financial emergency.
Are Rates Too High?
Payday loan rates are higher than other forms of credit for a
couple of reasons. First of all, payday loans are for a small
amount for a short period. Lenders have to cover the cost of
processing such transactions. Unlike mortgage companies, payday
companies don't add up interest charges for 30 years.
Secondly, payday loans are at a higher risk of defaulting. Since
there are no credit checks, people are more likely to fail to
pay back these types of loans. That cost is passed onto everyone
else.
Understanding The Numbers Rates
Most people get excited about APRs, annual percentage rate. If
you compared the APRs of payday loans and mortgages, you will
find the payday loan will have the larger number. But, that is
misleading.
For one, payday loans are held for days, not a year. So you
never pay that percent. With mortgages and other types of loans,
you take years to pay the interest and principal. So with a
payday loan, on average you would pay 15% of the loan in fees.
With a mortgage, more than likely you will pay over 100% in
interest charges.
Rates Lower Than Late Fees
Taking a look at late fees on some bills or credit cards, they
can be significantly higher than the fee for a cash advance.
Fees can also really add up with bank and merchant charges for
bounced checks.
On average, a cash advance of $100 will have a $15 finance fee.
Often bank fees average around $25 for each NSF check. Merchant
fees are often higher. So while it will cost you for a payday
loan, they are cheaper than paying late charges. You should also
consider the impact on your credit report.
In the end, you have to decide if a payday loan is in your best
interest. With instant service and fast cash, payday loan fees
can be insignificant compared to other costs.
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