Over the last two weeks, the loan industry happens to be found in the news very frequent. A good number of the topics that written about is relating to mortgages and investing.
Nevertheless, it would appear that financial circumstances get more focus compare to politics for the country. Therefore, it is foreseeable that it’s going to be a matter of time for payday loans end up being the target topic for lobbyists soon.
You can see that certain states have already banned payday loans. Cause many people feel that the high APR(Annual Percentage Rate) is totally unjustified and can caused a high risk for consumers. And there are also some states authorized lenders offering payday loans, but you will find the rules and regulations are very strict.
However, you can still find a few of other states are offering payday loan services with very lenient rules and regulations. Lobbyists in different states are trying very hard on each side to either prohibit these type of loans, or intensely regulate payday loans as “consumer friendly.”
Payday Loans and Their Terms
A payday loan also some people called cash advance, can be described as short-term loan intended to be paid back by you once you receive your next paycheck. If you are not so sure about payday loans, we will try to explain the common language and jargon use in the loan industry:
Principal – the initial amount of money loan to the borrower.
Term – this is the time frame for a borrower to pay back the loan with adding interest.
Interest – the fee evaluated by the loan company to the consumer for the service of loaning the amount of money.
APR – also known as Annual Percentage Rate. It is the percentage of the principal that borrower need to pay in interest in one year.
Payday Loans Scenario
At this moment why don’t we take a look at the way a loan company making money by lending payday loans. In case a consumer borrows $1000 on Monday and gets paid on Friday, in this scenario the term for the loan is 5 days. And you need to know that interest is usually calculated in APR in spite of the term, so let’s say the APR for this payday loan is 350%.
The consumer who borrowed 500 on Monday will pay their lender about $1050 on Friday. The borrower got the money that they wanted and the loan company was paid $50 for offering the borrowers the money they needed.
You shouldn’t worry about APR too much. There are lobbyists who stressed for getting interest measured in APR that can wounded payday loan lenders.
A 350% of APR appears to be incredible for most consumers. But this 350% is actually for annual. Which means the percentage is for time period of 12 months, once the course is over you will have to pay 350% of the principal which is way too much. As long as you are not borrow for a large sum of money, and make sure you are able to pay back in time, then you will have no issue with it. Normally, the pay back period for payday loans are about 14 days or less.
Now we know about APR, how if we now change it to DPR(Daily Percentage Rate)? Payday loans with APR of 350% is about 1% of DPR. Which means the term for your payday loan is going to cost you about 1% of the principal everyday. You are feeling more released now compare to the magnificent 350%, right?
And this time we presume the consumer need to pay back their payday loans in 10 days time rather than 5 days. They only need to pay 10% of the principal, or $100 in interest. This is exactly what the critics of payday loan would not like you to be aware of.
Here we go to assess on a bank loan. Assume a consumer gets a $10,000 loan from the bank, with a 5 years term. And the consumer is receiving just 20% of APR. So the consumer will think what a great deal he got for the loan and would rush to grab it.
Alright, let’s say the consumer need to pay 20% of the principal every year, he will need to pay an interest of $2,000 every year. Can you calculate how much the consumer had paid after 5 years? It is $10,000 principal plus additional interest of $10,000. Which means the consumer paying back interest of 100% of the principal after 5 years. But shamelessly banks and their lobbyists still would want you to believe the payday loan lenders are ripping people off?
Well Prepare Yourself Before Going For Payday Loans
You should have some ideas by now at the time you applying for payday loans, one thing that you only need to pay attention to is how much interest I need to pay back either for APR or DPR? In case you will repay your loan in a few days time, then you just have to pay for about 10-20% of interest.
You should not be fooled by the government mandated APR. The APR is there due to the cause that lobbyists wish to threaten you to stay away from any payday lender. In fact, you would pay less interest rate if you choose to borrow from payday lender instead of going for a bank or credit union.
Do not do a comparison of the APR of a bank and a payday lender due to the reason the loans they offer are different. You just shouldn’t compare oranges and apples. What you actually should do is searching for reliable payday loan lenders in your city or surf online and compare their APR.
Choose for the payday loan lender who is able to provide you the best interest rate. In case you’re wise enough and doing research before applying for payday loans, then you should be able to look through the tricks of APR of the banks and their lobbyists. Never ever let them have a chance to fool you around.