I’ve never used a payday loan. In fact the only information I really knew about them was that they charged a lot of interest. So when I had a request from National Payday about doing a paid post about payday loans I thought it would be a good idea to do a paid little research since I have yet to cover this topic before.
First the basics, what is a payday loan? A payday loan is a loan for a smaller amount of money (up to $1500 and typically less for first time loans) for a period of a few weeks. The basic idea is the loan is only supposed to be used to bridge someone between pay cheques. It is some what similar to a bridge loan from your bank for a house deal. Really high interest rate, but for a short time.
The payday loans has been in the news off and on for years about how they prey on poor people. This I disagree with, since after all no one forced you to take out that loan. You read the deal and if you didn’t understand it you should have asked questions. I can’t stand people that complain about things when it was their own fault in the first place.
Now as I touched on earlier the interest on these loans are high. For example, interest from a few different sites I looked at ranged from 20 to 30% of the original loan amount. Which to you or me this seems high. After all people with good credit can have a line of credit at prime plus 2.5% fairly easily (under 9%). Yet that 9% is annually. That 25% is over a matter of weeks. So translating that 25% fee to a annual interest rate results in a rate of 500 to 1300% depending on the amount of days the loan is for.
So obviously a typical credit card interest rate would be cheaper. Yet these companies are still in business. How is that possible? Simple, they take on people with less than perfect credit. Which there are a fair number of people without savings or without any support tend to find themselves using a payday loan. It’s not the end of the world if they do, but there is some high fees/interest involved. So overall I would suggest you be very wary of using these loans.