Payday Loan Scams

Pay day loans are a short term loan intended to cover your expenses until the next payday. It is quickest way to get a loan. It is also called cash advance, check advanced or deferred deposit loan. Payday loans are one of the most popular loans that a consumer searches for. The approval process may only take 20 minutes and it typically ignores your credit score. The only real requirement for loans like this is that you have verifiable income.

Payday lenders have been painted as scam artists in the media because they will advertise rates that are around 10%. On the surface, these rates do not seem much different than what is being offered at the local bank. The magic is in the calculation. Banks will advertise rates on an annual basis, but payday lenders advertise and quote a monthly rate. Comparing apples to apples, a 10% monthly rate really calculates to something around 120%.

Now, payday lenders will tell you that these are short term loans and no one will ever pay interest for the entire year, to ever get to that 120% figure. That logic is flawed, however, because to continue with the comparison to the bank, a loan that is paid back to a bank within one month that quotes a 10% annual rate will really only be closer to 0.8% interest using the payday calculation.

To use real dollars, let’s assume you borrowed $1000 from a payday lender who has quoted you a 10% monthly rate. Say you paid it back in exactly one month (payday lenders typically require payment sooner). To calculate your interest charge, simply multiply the amount borrowed $1000 by the monthly interest rate 10% ($1000 x 10% = $100). That doesn’t seem bad, does it? The problem is that most payday lenders will charge rates much in excess of this. Now let’s assume you borrowed the same $1000 from a bank at a 10% annual rate. To calculate your interest charge, simply multiply the amount borrowed $1000 by the monthly interest rate of 0.8% (simple average monthly rate). Your interest charge would be $8 for the month ($1000 x 0.08% = $8). That’s a saving of $92 in interest.

Unfortunately, for many payday lending customers, going to a bank isn’t a viable option. This could be because they have bad credit. Payday loans are not a scam; they are an option for people that don’t have many other options. However, they are hardly an effective financial tool no matter what your situation is. A finance charge of $100 on $1000 is a hefty fee to pay to advance yourself money a few weeks. The purpose should really be life threatening before you even consider such a loan.