How to be a Responsible Borrower
You might have seen recent news coverage concerning payday loans and their critics.
Opponents to the industry contend that these types of services take advantage of consumers, charging incredibly high interest rates and trapping their customers in a cycle of debt.
With all of this negative information flying at you, you might be hesitant to take out an advance.
However, if you use the service responsibly, you should be able to avoid the high costs often associated with this form of finance assistance.
A typical advance will come with finance charges ranging from 10 percent to 25 percent of the value of the service. When determining these charges, the loan plus the fee is used as the base amount of the service.
For example, an advance for $200 might come with a $30, or 15 percent, finance charge. While the total borrowed amount used to determine the finance charge is $200, the actual fee is subtracted from the total amount before the service is provided to the borrower. So, in this case, the borrower would receive only $170, or $200 minus the $30 finance charge.
When looked at as a singular charge, a 10 percent to 25 percent fee might not seem like a great deal. If your power bill is due and you desperately need $170 to keep your power on, then $30 might seem like a reasonable amount to put up.
The incredibly high charges associated with these services cited by the industry's opponents most often occur when the borrower does not use the service responsibly.
Most standard loans provide extended repayment periods, allowing borrowers to gradually take care of the balance. This type of repayment plan is not the case with unsecured loans.
These services are meant to be short-term loans - they are designed to be repaid within 14 to 31 days. Borrowers begin to get hit with high fees when they are unable to repay an advance in the allotted time.
Take for example a customer who needs $425 quickly. The customer would provide the lender a personal check totaling $500, which includes a 15 percent fee of $75. At the initial stage of the agreement, the $75 finance charge equals a 460 APR.
Now, assume that two weeks go by and the customer is unable to take care of what is owed. He or she is able to roll the balance over to another one, but the lender charges the customer an additional $75 fee. At this point, the finance charges total $150, which is equivalent to a 920 APR.
By continuously rolling over the advance, the finance charges begin adding up quickly, which is where customers can get into financial trouble.
So, how can you avoid fees? The answer is by using the service responsibly.
- When considering using an advance, shop around - many lenders offer specials to new customers that can significantly decrease the amount of fees you end up owing.
- Make sure that you borrow only the amount that you actually need - loans should not be used to purchase fun but unnecessary items.
- Read the terms and conditions of your agreement carefully and do not be afraid to ask the lender questions - it is always best to fully understand the process.
- Take the necessary steps to ensure that you can repay the amount owed by the repayment deadline - extending the installment is typically where borrowers get into trouble.
- Avoid using one advance to take care of another - this exercise is what entraps borrowers in a debt cycle.