If someone told you that they would lend you $500 today if you
repaid them with $5000 a year from now, would you take it? What
if the repayment amount were only $2500? Would that strike you
as a good deal? This may sound like an insane amount to repay on
a small loan, but that, in effect, is what thousands of
consumers do every day when they take out a payday loan.
Payday loans, also known as cash advance or quick cash
loans, are short term loans that typically last about two weeks.
In exchange for borrowing relatively small sums ranging from
$100-500, the borrower pays a fee that can range from $10-40 per
$100 borrowed for the two-week loan. The borrower writes a
postdated check for the borrowed sum plus the fee, which the
lender may cash two weeks later.
These fees may seem
relatively small, but when viewed as an annual percentage rate,
they actually amount to anywhere between 250-1000% per year.
That's an astronomical amount of interest in a world where a
credit card loan at 25% is considered to be high. And yet, the
payday loan business is thriving and there are now some 23,000
stores in America that offer some form of these cash advance
Why do people take out such loans? The primary
reasons are convenience and a lack of better alternatives. These
stores are now so common that there are often several of them on
a single block. They don't do credit checks and they will lend
money to pretty much anyone with a steady job. And the borrowers
tend to be people who do not have access to other borrowing
options, such as credit cards, friends with money or a local
credit union that offers short term loans.
these financial products say that they are simply offering a
product that the public wants. That may very well be true, as
these businesses are doing very well. What remains to be
answered is whether the public really wants to borrow money at
500% per year. In all likelihood, they are doing so only because
they cannot find a less expensive option. Anyone who needs a
short term loan is more than welcome to go to a payday loan
store to get one. But any potential borrowers should realize
that they making use of one of the world's most expensive forms
About the author:
ęCopyright 2006 by Retro Marketing. Charles Essmeier is the
owner of Retro Marketing, a firm devoted to informational
Websites, including End-Your-Debt.com, a site devoted to establishing credit,
debt consolidation and credit counseling.
Other Related Articles:
The What and the Why of Homeowner Loans
Homeowner loans are loans that are given to borrowers who own a house. Homeowner loans are secured loans for which the borrower has to offer his house as collateral. If you avail a homeowner loan against your house which is already mortgaged,...read more
Finding a Mortgage Loan with Bad Credit
If you have bad credit, you might think that you'll never be able to find a lender willing to offer you a loan for some of the better things in life... especially high-value loans such as a mortgage loan to buy the house of your dreams. You'll be...read more