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Fees: What are they with Payday Loans?

As you are sure aware we live in difficult financial times. While the unemployment rate hovers around 10% there are indeed a quite a few people with short term cash flow binds from the unexpected medical expense or car repair usually lasting till their next pay check. They simply need a bridge loan to help them through to the next pay period. With this in mind a host of non-traditional financial lending organizations have come to the rescue.

If you happen to be in the minority of people who are unaware with this method of lending, a payday loan was designed to bridge a borrower's cash flow problem till their next pay period. The sums usually loaned are in the neighbourhood of $100 up to $1000.

Of course these financial organizations are not charities and in the capitalist economy need to make a profit as such obviously there are fees related to procurement of such types of loans. There is a wide range of offerings but if we were to offer a rule of thumb for such fee we could say that they are consumers are charge approximately $15 for each $100 borrowed. The cost may seem expensive in comparison to traditional banking institutions but the swiftness of disbursement often outweighs the issues of cost.

What is the fee based on? The actual rates offered (not the rule of thumb offered above) are guided by the documentation you have provided in your request. The lender sometimes weighs monthly salary, current debt load, and employment record when making their lending offer. Obviously, each institution and each loan offer is slightly different given the particular case it is considering. It could happen that an institution will present you with a lower payday loan option fee whereas some other could present you with a host of repayment schemes.

Coming back to our rule of thumb we can examine the cost of a payday loan compared to the cost of a not getting any funds to handle a tight situation, in our example we will compare APR (annual percentage rate) for the two options.

  • $100 payday disbursement with $15 associated charges = 391% APR;
  • $100 bounced check with $48 NSF/vendor charges = 1,251% APR;
  • $100 charge card balance with $26 late charges = 678% APR;
  • $100 electricity bill with $50 late/hook up charges = 1,304% APR.

The $15 charge for the pay check disbursement pales in comparison to the charges associated with consequences of doing nothing. Indeed the charge for the payday disbursement much less than the cost of the consequences of doing nothing ($48, $26 and $50). Furthermore, the APR for the advance is less than the other options.

How can one minimize risks with such a loan? In summation, presupposing you do your homework, it is certain you've heard a few nightmare stories from earlier consumers of pay check loans. However it is important to realize that many of these consumers have not acted in a responsible manner with their repayment. Of course, if you barrow responsibly, research the reputation of the lender as the numbers above show you are certain to extract a satisfactory result from your loan experience.