A payday loan, also referred to as a paycheck advance, is a small, short-term loan that is usually intended to cover some one-time unexpected expense. It is typically repayable upon receipt of the borrower’s next paycheck. Finding low cost payday loans is just a matter of utilizing the online resources to compare lenders and programs.
Definitely do your research before wandering into that little shop around the corner with the flashing neon “Checks Cashed Here” sign.
In the United States, payday loan regulations differ from state to state. Some states mandate strict interest rate limits on these types of loans. A state may have a maximum annual percentage rate (APR) that any lender doing business in that state can charge. Some states have outlawed payday loans altogether.
One key to comparing terms on payday loans is to ensure that you know the difference between APR and EAR. The EAR, or effective annual rate, is the rate charged when compounding assumptions are in effect. APR ignores the effects of compounding.
For example, let’s assume that a payday loan company charges a $15 surcharge on a $100 two week payday loan. That means you get $100 today and will pay back $115 in 2 weeks.
The annual percentage rate on that loan is:
15% X 26 = 390% (surcharge divided by amount borrowed then multiplied by 52 divided by the number of weeks in the term)
However, the EAR is:
1.15^26 - 1 X 100% = 3686%
This essentially assumes that if the lender makes 15% every 2 weeks and reinvest that 15% into a new loan, he will earn 3686% on his original investment of $100 in a one year period.
Quite a lucrative lending business to be in. But if you do find yourself in dire straits and need to find a low cost payday loan, make sure you understand which type of interest rate they are quoting.
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Posted under Low Cost Payday Loans
This post was written by admin on April 8, 2009
