Payday loans revisited

Payday loansWe’ve talked quite a bit about Payday Loans and when they can be appropriate, as well as other options. We want to mention a few other things for your information and consideration as well.

When considering a cash advance company, be sure to ask about state licensing. Not all states allow the operation of payday loan businesses, but in those that do, you should be sure to seek State Licensed Cash Advances when taking out this sort of loan.

Another question concerns online applications. If you are planning to do business with a company via the internet, be sure to ask BEFORE you begin the application process about their security measures. They will be asking you for sensitive financial information, so be sure they use appropriate encryption technologies to protect your personal data.

Another feature we’ve noticed with some lenders involves the interaction of fees, interest rates, and loan periods. Generally, most of the cost associated with a payday loan are due to fees charged on the loan, while the amount actually considered to be interest is quite reasonable. The lenders are offering money with no credit check and minimal security for themselves, so they are expecting a high return on their risk. The return usually takes the form of fees you are required to pay for the processing of the loan.

The advantage to consumers occurs when the fees are fixed, and the repayment term offered is flexible.

Let’s say you take out a $500 loan to cover an absolute emergency. You THINK you can probably pay it back when you receive your paycheck next week, so you ask for a 7-day term. The interest rate on our example is only $2.50, which won’t even pay the wages of the person filling out the forms. Instead, the lender makes their money on the $112  fee they charge for processing the loan. In 7 days, you are expected to pay back $614.50.

Now, the problem comes when ANOTHER unexpected thing happens. You get really sick, so your next paycheck is a little short from the two days you missed with the flu. Soooo …. your only option is to extend your loan. This time you ask for 14 days, to make it to the next paycheck. Generally, you are going to have to pay another fee and more interest.The term is a bit longer, so now you are paying $3.50 for interest, but another $112 for fees.

At the end of 24 days, you will have to repay $730 for not one but TWO payday loans.

There is a smarter way to do this. Instead, find out what the maximum loan term is. If you can borrow the money for 29 days, for example, when you first apply, the interest jumps to only $7, and the fee is STILL the same $112. Now, you will be expected to repay the loan after almost a full month, and will only be expected to pay $619. Your savings over the above scenario is significant, and you have a longer term to repay. (Although we’d recommend paying it off as quickly as possible anyway, just so you don’t end up in an unexpected situation like the one described above and needing an extension.)

The details will vary with the state you live in, and the company selected. The above details were using Florida and PayDayOne as an example. Most states offer even longer repayment terms for even more significant savings, although a very few limit terms to a shorter period.

The bottom line is this: you are responsible for your financial well-being. Check into all of your options, and find the best ways to manage your money in every situation in order to maximize your potential from each decision.