A payday loan is indeed a very expensive loan as claimed by lots of people when compared to other types of loans - no doubt about it! It's a norm that the annual percentage rate (APR) of a typical payday loan gets up to 300% and even to a staggering 1000%. However, payday loan is costly cash only holds true when a borrower treat payday loan as a long-term loan! Most of the time, we heard unlucky stories of borrowers caught in an unrecoverable bad credit dilemma and payday lenders are all to blame. But wait! Have a look in the details of the story. You'll find that in fact, they are to be blamed for these unfortunate situations. Most of these unlucky "victims" share a common mistake - they didn't plan their financial budget properly. They don't settle the loan as soon as it ought to be and worst when they roll-over the loan times over times! What if a borrower clears up the loan without roll it over? For sure the situation wouldn't get that bad and disastrous.
Let's take a look at the true purpose of payday loan - to work out any emergency cash flow problem in short run. Short enough to get you over to the next payday. It's hardly comparable when ones look at other finance charges such as late payment charge, bounce back charge, NSF charge and etc. If all these charges are converted to APR, they yield to an even higher rate! Well, some may claims that these charges are not a form of credit and hence APR is not applicable! But from a consumer's point of view, they are the same - the same money consumers pay!
Typical charges found under different cases for example:
- NSF fee at banks: $28
- Merchant Returned Check fee: $20
- Credit Union NSF fee: $18.91
- Apartment Rental Late Fee: $30.22
- Mortgage Lender Late Fee: $28.24
- Auto Lender Late Fee: $20.33
- Utility Late Fee: $15.25
- Utility Reconnect Fee: $44.75
In comparison, when annualized as APRs under a two-week term:
- $100 payday loan with $15 fee= $391% APR;
- $100 bounced check with $48 NSF/merchant fees = 1,251% APR;
- $100 credit card balance with $26 late fee = 678% APR;
- $100 utility bill with $50 late/reconnect fees = 1,304% APR.
The usage of payday loan services under a right way serves as a valuable service to the consumer. Most of the bigger financial institutions close the eyes to this underserved demand. The credit risks and reputation risks are some of the factors that these depository institutions don't offer payday loan. Payday loan lenders take great risks in doing their business. So, high pricing on the loan is needed to justify that risk which is significant, even when compared to other types of unsecured lending such as credit card. Apart from that, the processing costs for payday loan do not differ much from their higher-principal, longer-term counterparts such as auto loans and mortgages. Therefore, conventional interest rates at these lower dollar amounts and shorter terms would not be profitable. For example, a $100 one-week loan, at a 20% APR (compounded weekly) would only generate 38 cents of interest, which is a no match to the loan processing costs.
Research found that the operating costs of payday lending lie in the range of collected advance fees. After minus off the fixed operating costs and the unusually high rate of default losses payday loans don't result in extraordinary profits. Higher default rates for payday loan portfolios and these loan losses can average 15% or more of loan revenue. Underwriters of payday loans must also deal with people presenting fraudulent checks as security or making stop payments.
When the payday lending is exploited and abused, the borrower should be the one to blame, not the lender. While there are tons of information out there stating pay day loan as an expensive loan, loan-sharking or etc, however the fact is that payday loan is still a very much preferred option by borrowers compared to other loans.