How to Use Payday Loans Responsibly
You might have seen recent news coverage concerning payday loans and their critics.
Opponents to the payday loan industry contend that these types of loans 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 a payday loan.
However, if you use payday loans responsibly, you should be able to avoid the high costs often associated with this form of finance assistance.
Calculating Payday Loan Costs
A typical payday loan will come with finance charges ranging from 10 percent to 25 percent of the value of your loan. When determining these charges, the loan plus the fee is used as the base amount of the loan.
For example, a payday loan for $200 might come with a $30, or 15 percent, finance charge. While the total loan amount used to determine the finance charge is $200, the actual fee is subtracted from the total amount before the loan 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 pay.
The incredibly high charges associated with payday loans cited by the industry's opponents most often occur when the payday loan borrower does not use the payday loan responsibly.
Most standard loans provide extended repayment periods, allowing borrowers to gradually repay the loan. This type of repayment plan is not the case with payday loans.
Payday loans 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 a payday loan in the allotted time.
Take for example a payday loan customer who needs a $425 loan. The customer would provide the payday loan business a personal check totaling $500, which includes a 15 percent fee of $75. At the initial stage of the loan, the $75 finance charge equals a 460 APR.
Now, assume that two weeks go by and the customer is unable to repay the loan. He or she is able to roll the loan over to another payday, 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 payday loan, the finance charges begin adding up quickly, which is where payday loan customers can get into financial trouble.
Responsible Payday Loan Borrowing
So, how can you avoid payday loan fees? The answer is by using payday loans responsibly.
- When considering using a payday loan, shop around - many payday lenders offer specials to new customers that can significantly decrease the amount of fees you end up paying.
- Make sure that you borrow only the amount that you actually need - payday loans should not be used to purchase fun but unnecessary items.
- Read the terms and conditions of your payday loan carefully and do not be afraid to ask the lender questions - it is always best to fully understand the loan process.
- Take the necessary steps to ensure that you can repay the loan by the repayment deadline - extending payday loans is typically where borrowers get into trouble.
- Avoid using one payday loan to pay off another - this exercise is what entraps borrowers in a debt cycle.
