January 17, 2011
Are Pay Day Loans A Valid Financial Tool?
Given the current economic situation in America, many people are having to find creative ways of taking care of unexpected expenses and, sometimes, even day to day bills. But where can someone turn to find a quick infusion of cash? What if getting a loan from a bank is out of the question? Many individuals have credit cards that are maxed out or have bad credit. For individuals who have a monthly source of income, even if it is a unemployment check, they can get qualify to get one or more pay day loans.
Consumers everywhere are flocking to their local check cashing stores in search of a pay day loan. It is a fairly simple process to be entered into their system, but once you are in, getting a pay day loan is usually quick and painless. Pay day loan companies will want a photo ID and proof of income to enter an individual in their systems. Once this is provided, the typical range of money available is between $100 and $255.
What many consumers fail to realize is that pay day loans are not a long term solution, they are a quick fix. And they will cost you. A loan of $255, when paid back typically within two to 4 weeks, will require a $300 payback. That is a $45 dollar fee. If someone were to do this every two weeks for an entire year, it would cost them nearly $1200.
What if someone needs more than a few hundred dollars? Online, there are seemingly an endless number of websites that are willing to loan up to $1500 in an hour or less as a pay day loan. What often times is not clearly disclosed is that new or newer customers will typically only receive a loan of a few hundred dollars, with a maximum payout often times around $500. Where the large sum of money seems very appealing, the consumer must be aware of how these loans work. They usually auto refinance, which means that at the end of each term, which is usually two weeks, the finance charge is added to the principle and the new finance charge is recalculated. For someone using one of these loans, if the fail to pay off at least the finance charge, they will be stuck in a downward spiral roller coaster of debt.
In reality, most pay day loan stores online will only offer a few hundred at a time, especially to first time users. Anything more than that and the consumer is stuck with an auto refinancing loan. What this means is that the loan is established for a period of time, usually about two weeks. When the loan is due, if the finance charge is not covered by the consumers payment, it is added to the principle and recalculated. This can end up costing thousands of dollars and leaving the consumer in a worse financial situation.
Are there any other alternatives for emergency funds? There are only a few companies that will provide a consumer with an actual loan that is set up for a duration of 24 months or longer. The downside to these loans is that the interest rate is often close to 90% or more. This means that a loan for $2500 may end up costing nearly $10,000 after 4 years of paying it back.
As with all financial decisions, it is up the each individual to decide what is best for them. In regards to pay day loans, it is wise not to rush into them without having planned ahead on how to best utilize the funds and pay them back. Pay day loans can definitely be useful financial tools, but they should only be utilized as a last resort.
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