Learn the Benefits of Short-term Loans
As with any financial transaction, the informed payday loan consumer is most likely to have a positive experience. If you fail to educate yourself on finance charges and what they mean for your pocketbook, you place yourself in a dangerous position that makes you vulnerable to predatory lenders. The more you know about these charges, the better off you'll be financially in the long run. Before you take out a cash advance, take a few minutes to read through the simple overview of interest charges we've provided below.
Why the APR is a Misleading Figure
When you shop for your advance, you'll notice that the most common way providers express interest is in a percentage of the amount borrowed. For instance, your lender might charge you a $15 finance charge for every $100 borrowed. Lenders favor this method because it's a more accurate reflection of what the lending product will cost.
However, by law, all lending companies have to disclose a figure known as APR, or annual percentage rate. You will typically find this number in bold on the agreement you sign with your provider. When you first see this number, you might experience a little sticker shock. For example, if a lender assesses a $15 fee for every $100 borrowed on a two-week advance, that translates into a rate of 390% (26 terms in a year multiplied by 15%). Obviously, that would be an exorbitant amount to pay if you indeed took out an advance for a whole year.
Obviously, though, that is not how these fast cash services work, which is why many financial experts contend that APR is not a useful or accurate metric for short-term lending. When you only plan on borrowing the money for two weeks or so, you can hardly gauge what you will pay by the astronomical rate that assumes a 56-week term. Your best bet is to pay attention to the finance charge expressed as a percentage of what you want to borrow. That way, you can easily get a feel for how much you will pay for the convenience of having the funds advanced to you.
Avoiding Unnecessary Expenses and Fees
Now you know how to identify and interpret your interest costs, but that is only half the battle if you seek a positive and affordable borrowing experience. You also must consider how variations in rates and terms directly affect your total cost. First, remember that significant disparity can exist among the financing rates of various lending companies. For this reason, it's worth your while to investigate the rates of several different providers.
Even more importantly, you need to understand how quickly expenses compound when you do not pay your amount owed on time. When you fail to repay the original amount on the due date, you will have to roll the loan over for another term, which will cost you even more in addition to the principal balance. In fact, according to the Consumers Union, the company responsible for Consumer Reports, the average short-term borrower makes 11 such transactions per year. Borrowing a short-term product every now and again won't hurt you, but the costs will begin to pile up if you misuse/overuse the product. Borrow sparingly and keep interests costs constantly in the back of your mind.