In the days where the Mafia ran rampant around town and when underground ‘banks’ were commonplace, we saw loan sharks feeding on the desperate and making all kinds of money at the peril and expense of others. Since then there have been a number of laws put into place to ensure the loan sharks become extinct, to and put an end to short term loans with excessively high interest rates.
However, recently we have seen the emergence of an all new ‘legal’ loan shark operation, better known as the payday loans.
The payday loan industry is relatively new and has become a multi-billion dollar business that supposedly assists people who are struggling financially to borrow money on a short term basis until their next paycheck. In simpler terms, it is an industry that is built upon taking advantage of people in the lower income brackets that have difficulties even managing to live paycheck to paycheck.
Why a Payday Loan is a Bad Idea
The first and most important thing to realize when considering a payday loan is the annual percentage rate associated with that type of loan. Initially if you simply look at the numbers, then paying $360 for a two week loan of $300 does not seem that bad, especially if you are desperate.
However, a loan such as that actually carries an annual percentage rate of well over 500 percent. Consider the fact that the average credit card comes with a rate of around 20 percent, and you realize just how expensive payday loans work out to be.
Payday loan lenders understand that their clients are in a tough situation and feel that they have nowhere else to turn, so they really take advantage of that with their offers to lend money with little restrictions. So if you have any other alternatives available, it is easy to see why you would be better off to look at other options.
When is a Payday Loan a Good Idea?
Despite how terrible the rates offered are, there are certain situations when a payday loan can actually make sense. The biggest example of this is at a time due to a short term shortage of money when you may be unable to make even the minimum payment to a creditor. Often times the late fee you will be charged ends up being more than the fee associated with the payday loan, which saves you money in the long run. It can also help you save your credit score from taking a big hit, which can also have an adverse affect on your credit rating and more costly in the long run.
Of course, a payday loan may also be worth the fee and inflated APR if you decide that the loan personally helps you out and works specifically for your situation and for you. Maybe you need some extra money for your next vacation to ensure that you have a fantastic time, or maybe you need to attend a certain event that wasn’t in your budget. You may be able to afford the additional fees at the time, which can make it worth the process.
Better yet, there are some payday loan companies that actually offer a free loan to first time customers. As long as you can keep things under control and not return continuously for a loan after the first time, then the loan could definitely be worthwhile.
So you have decided to get a Payday Loan
If you make the decision that a payday loan works for you right now, then there are a few things that you need to consider. The first thing is of course the APR, and seeing as the government states by law that every lender must have full disclosure and be open with the total cost of a loan it is quite easy to find out exactly what that amount is.
Once you have compared the APR for all the payday loan options, you should also look into the length or term of the loan. If two companies offer the same rate but one of them offers a longer term, then that is the better loan of the two. Just make sure that you read the fine print and also make sure that the rate they offer is fixed. You certainly don’t need any more surprises like a jump in the payment due to an increase in the loan interest rate.
When it comes down to it, you always have to do all of your homework when it comes to applying for a payday loan. The more you comparison shop and educate yourself, the more money you may be able to save.
The more you know, the better off you will be, and that holds true with almost every topic within the realm of personal finance.