You have seen them on the corner and in the poorer parts of
town with names like "Quick Cash", "Quick Loan", "Payday
Loans", "Car Title Loans". They are starting to sprout
up all over the country and will soon rival Starbucks for
sheer number of locations.
They are the new trend in predatory lending practices but
still manage to fly under the radar of regulation in most
states. They don' t charge interest, they charge a
"fee".
But it sounds like the ultimate in convenience. Need
some quick cash - stop by and in just five minutes you can
be out the door with $100, $500 even $1000 dollars.
But what is the true cost of this "convenience"?
How It WorksA cash advance or payday/paycheck loan is usually secured by
a personal check. Some companies want your bank
account or credit card information in addition to or instead
of a check.
You write a check to be cashed or agree to have an amount
withdrawn from your bank account sometime in the future;
usually 14 days (the standard payroll period).
After completing the agreement/contract you are given an
amount that is less than what you have agreed to pay.
The difference is the "fee" for the loan service. And
you have got your cash!
Why It WorksWhy is the company willing to loan you money like
this? Simple, because loaning out money for these
"fees" really amounts to a huge profit at your expense.
For example, say you borrow $200 and the lender charges a
"fee" $15 for each $100. Within 14 days you will have to
pay $230 for borrowing $200. Now if the $200 keeps you
from having to pay a $100 late fee or penalty on something
it is probably worth it. But if you just want the
money today, you are paying a high price.
You are paying 15% interest for a 14 day loan. That
amounts to 3785% compounded interest yearly! No wonder
lenders are happy to loan you this money. If they loan
you $100 and you pay them back with an extra $15 in two
weeks and they loan out the $100 again along with the $15
extra you paid, and they keep doing this for one year, they
will turn their $100 into $3785 by the end of the year!
Maybe you should be loaning your money to them rather than
borrowing from them.
What To Watch Out ForEarly repayment fees. Pay off your loan early and they
sock you with another fee.
Late repayment fees. You may have to pay the entire fee
again if you miss the payment date.
"Membership" fees. Some companies charge you to become
their customer along with charging you as their customer.
Giving lenders access to directly debit your bank account.
Just hand them your wallet, it's quicker.
Fine print (as in all contracts). Know what you are
signing or don't sign it.
Bounced check or debit fees. Make sure you have money in
your bank account or you get to pay your bank a fee as well.
"Collateral" requirements such as a car title. Miss your
payment and you may be missing your car - permanently.
There Is A Better WayThe root problem here could be that you are getting
strangled by your debt payments. Credit cards, store
accounts, installment payments and such can eat up your
income quickly. Ite may be time to visit a non-profit
credit counseling service or create a debt reduction plan
for yourself.
Or it could be that you are just spending more than you
make. You may need to spend a few minutes each week
and write down your expenses. Then categorize and
total them to see where your money is going. Then
record your income for the same time period and make sure
that you are not spending more than you make.
Sure, everyone gets behind occasionally. But you need
enough room in your budget (this means spending less than
what you make) to accommodate the "budget busters" and
surprise expenses that may come up. It may mean
cutting back on cable, magazine subscriptions or eating
out. But last time I checked, McDonalds did not charge
a $15 "fee" for making your food.
About the Author
© Simple Joe, Inc.
David Berky is president of Simple Joe, Inc. which sells the
Simple Joe's Debt Eraser PC software. Debt Eraser can help
anyone get out of debt quickly and inexpensively by creating
a href"http://www.simplejoe.com/debteraser/index2.htm">Rapid
Debt Reduction Plan. This article may be freely
distributed as long as the copyright, author's information
and an active link (where possible) are included.