As Bennett explains, payday loans are more expensive than other types of loans due to their short-term nature and high credit fees. To calculate the APR, or annual percentage rate, of a payday loan, you compare the interest and charges on the amount borrowed to the cost of a one-year period. This is why payday loans are so expensive. There are fixed costs that must be paid when making the loan decision, such as having the physical infrastructure to make the loan, and a default rate that needs to be covered.
Lending small sums of money for short periods of time is an expensive process. Therefore, borrowing small amounts of money for short periods of time is an expensive thing to do. Payday loans are almost always more expensive than personal loans when it comes to borrowing money, and they're also riskier. If you qualify for a personal loan, choosing this option will allow you to borrow more money, give you more time to repay it, and charge you a lower interest rate.
So before you opt for fast and very expensive money, understand what payday loans entail. The APR for payday loans is high because it makes up a product for a year, which really only lasts a few weeks. This already inflates a very high interest rate, which is more than the average personal loan to cover transaction fees, the fact that it is not guaranteed and there is a higher default rate than other types of loans (about 15-20%). All this together results in a payday loan APR that ranges from 400% to 500% in the U.
S., and about 1,000% in the UK. Payday Loans Are Expensive and Can Easily Create a Debt Cycle. Because of the high interest rate, many people end up owing more than they originally borrowed and don't pay the payday loan. This opens them up to harassment from debt collection agencies, which buy the loan from the payday lender or are hired to collect it.
Payday loans are unsecured, meaning that every time a lender accepts a payday loan, he puts himself at risk. These may include the operating costs of a payday loan store, employees, conducting credit checks, or the logistics behind instant payments. In some cases, that might be true, but 80% of payday loans are renewed multiple times according to the Consumer Financial Protection Bureau (CFPB), indicating that most of these loans are not repaid on time. Be sure to read the loan agreement carefully to identify all charges and costs before you apply for a loan. Payday lenders generally don't assess your debt-to-income ratio or take into account your other debts before granting you a loan. Secured loans refer to loans backed by collateral, meaning that if a borrower is unable to repay the loan, the lender can recover the financial assets. Although payday lenders often operate out of stores, a new class of loan operator uses the Internet.
Payday loans only require proof of identification, income, and a bank account and are often given to people who have bad or non-existent credit. If you are unable to pay when your loan is due and state law allows renewal, the payday lender may allow you to pay only the charges due and then extend the due date of your loan. If the loan is secured in any way or if such loans are only offered to creditworthy persons, the default rate falls and so does the APR. Payday lenders must disclose the financial charge and annual interest percentage rate (APR) in writing before signing the loan. Payday loans are sometimes harder to repay than a traditional loan because lenders do not verify your ability to repay before lending you money. Payday loans can easily create a debt cycle because of their high interest rates; many people end up owing more than they originally borrowed and don't pay off their payday loan on time.
Default also opens them up to harassment from debt collection agencies which buy or are hired to collect on these loans. In conclusion, borrowing small amounts of money for short periods of time is an expensive thing to do; this is why payday loans are so expensive compared to other types of loans. Be sure to read all charges and costs before applying for any type of loan as well as understand what type of repayment plan works best for your financial situation.
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