How Expensive are Payday Loans?
The question “How expensive are payday loans?” can be answered in two words: EXTREMELY EXPENSIVE. Payday loans are usually expected to be paid off in two weeks. However, there are many people who are not able to pay them off that quickly and end up using most of their paychecks to attempt to pay off a portion of their payday loan. The fees alone could be $15 to $25, and that’s just for the first two week period.
Unfortunately, payday loans are becoming more popular because many people are finding themselves in a financially desperate situation. Very few of those who think they need a payday loan will consider the risk involved before they act, and many aren’t aware of these dangers until it is too late. Payday loans can be a financial nightmare, and they have the potential of causing a snowball effect when it comes to the borrower’s debt.
Horrible Annual Percentage Rates
There are so many examples you could find of people who made the mistake of taking out a payday loan and are now suffering the consequences. As a hypothetical example, let’s say Joe needs $100 right now, but doesn’t get paid for a few weeks. He decides to go to a payday loan store, and they agree to loan him the money. Joe then writes a check for $125, and they give him the $100 he needs. When he gets his paycheck, the payday loan company cashes Joe’s $125 check to complete the loan agreement. This may seem simple, but you must also realize just how much it cost Joe to take out this loan.
When you think about the annual percentage rate (APR) attached to this loan, you will be surprised just how much Joe had to pay for this small amount of money. To figure out the APR for a payday loan, you can use the following equation: APR=i x (365/n), where “i” is the periodic interest rate and “n” is the time period of the loan in days. In our example, the periodic interest rate is 25% ($25 fee / $100 loan) and the time period is 14 days. When you calculate the formula with those numbers, you can see that the APR for this particular loan was 651.79%!
Affecting the Economy
Gross Domestic Product (GDP) is the total value of all final goods and services produced in the United States, and it is a measure of total economic activity. According to a study by IHS Global Insight (USA) Inc. Consulting Services Group, all of these incredibly high fees attached to payday loans contributed $10.2 billion to the GDP in 2007. The total GDP in the United States that year was $13.8 trillion. This shows just how much unnecessary money is being contributed to our country’s economic activity because people decide to take out payday loans. This money could easily be saved and used to buy other important goods and services for American households.
The best way to avoid these unnecessary causes of debt is to build up funds in your savings account. With this emergency money stashed away, you will not have to worry about unexpected expenses. Payday loans used in these types of situations usually manage to make matters worse.
It is never a good idea to take out a payday loan. If you do, you are risking your financial future, and there are many ways to avoid having to take such a risk. If there is any alternative to type of loan available to you, then you should use that option instead.