Wed 4 Nov, 2009
Payday loans can be a very handy service for people who have a pressing need for speedy hard cash to see them through until their next wage arrives. Whether this is because of a cashflow problem, or an unpredicted bill, payday loans can help bridge the shortfall.
Cash advances come at a price though – and it's a hefty one. Cash advance loans are widely regarded as one of the most overpriced forms of legal borrowing out there, with huge rates of 1000% or more routinely found. Why are the costs so high?
The first thing to point out is that payday advance loans are taken out over a short period, while the common APR measure of interest charges is intended for evaluating how much interest would be paid over a full year. As next to no wage advance loans are taken out for this long, APR figures are perhaps not the best way of evaluating how expensive they are in more typical circumstances.
All the same, the prices are substantial. You're paying for convenience and speed, as most loans can arrive in your bank account within 24 hours, and also because of the lack of credit history checking you're also in a way paying for the risks taken by the payday lender who may extend money to individuals totally unable to repay it.
You're also being charged a larger amount because the lenders recognize that people who need funds pressingly are willing to spend more than those searching for longer term credit and are inclined to shop around for a less expensive rate.
It is this final reason that is the fundamental one cash advances are so overpriced – as a body, payday lenders recognize that they are the last option available for borrowers, and so can afford collectively to charge high prices for their doubtlessly popular services.