Loan Blogger

Cash Advance Loan Numbers Can Be Deceptive ~}

The payday loan industry is certainly a profitable one. In recent years, a lot of states have eradicated their laws against high-interest lending and the number of stores that offer such loans has exploded in the last five years. It is easier to find a cash advance loan than it is to find a hamburger from McDonald’s or Burger King, as there are now some 22,000 stores nationwide that offer temporary, high-interest loans.

The earnings from the $40 billion offered in loans every year are unbelievable. The average rate of interest on a two week loan is almost four hundred percent annually. The consumer pays a fee that averages about $15 per $100 borrowed over the two week duration of the loan, with an average loan amount of about $300. The idea of the “payday loan” is that it will tide the consumer over until their next paycheck. If the consumer cannot repay the loan in two weeks’ time, he or she can usually renew the loan by paying the fee a second time. The loans are certainly pricey; the 400% annual interest rate dwarfs the interest rates charged by credit card loans, which generally run no higher than 30% annually.

Apologists for the high interest rates mention that the high interest is necessary to cover those customers who don’t pay. They also mention that the rate of interest, as a yearly figure, is less than that of an overdraft fee charged by a bank if that were expressed as an annual figure. When comparing it that way, it seems there might be advantages to cash advance loans. But that kind of comparison is somewhat like comparing apples and oranges. The fees charged by banks are not fees charged for convenience; they are penalties. The idea is that you should not bounce a check, and the fee is intended to discourage you from doing so in the future. Plus, few banks charge fees as high as $60. Most charge half of that. In addition, it is a rare customer that writes a bad check intentionally. Most individuals, in theory, don’t write checks when they know they do not have the money in the bank to cover them.

For those who can afford to do so, borrowing money against a charge card could be a wiser choice, as the interest rate is much more reasonable; generally in the 20-30% range. And payback terms are much more versatile. No charge card company will demand full payment, plus interest, in a mere two weeks’ time.

The cash advance lenders are certainly correct when they point out that they offer loans to people who have few other options. Many of their customers have little or no credit and borrowing from banks or credit unions isn’t an option for them. But comparing high-interest loans to penalties for writing checks against inadequate funds is hardly a great example of how high-interest lending is cost effective.