I am not sure if it is that I am fortunate or that I am obsessed with my personal finances but I have never had to take out a payday loan. However, I have always been curious as to what these loans actually cost to the borrower.
The Pros of Using a Payday Loan
These types of loans are often criticized (probably with good reason as we do some calculations below), but I have to believe they have some positives or they wouldn’t exist. According to LaunchLoans,
- Personal loans are fast – Get quick approval on your personal loans and receive the personal loans funds often by the next business day
- Personal loans are convenient – Apply for personal loans from your home – no waiting in line, no extra paperwork and no faxing required to apply for personal loans
- Personal loans are personal – No need to feel awkward waiting in line at a personal loans store. With online personal loans, you apply for your personal loans from the comfort and privacy of home
- Customize your personal loans – Choose your personal loans amount, select your personal loans repayment schedule and create the personal loans options that fit you best
- Personal loans allow you to reach your goals – Our personal loans are designed to be more than just a fast cash personal loans solution. Personal loans can be the starting point for major life changes. Use personal loans to your discretion to get your finances back on track; use personal loans for home repairs; or use personal loans to deal with longstanding personal loans money needs
They don’t seem to mention it in their list of pros, but they are unsecured also, which would be a huge pro as a well.
But at what costs do these pros come? The Negatives of Payday Loans
Calculating the Interest on a Payday Loan
While it is easy to list the pros, but when talked about by other personal finance bloggers or the mainstream financial media payday loans always come down to the price (i.e. interest).
Since most payday loan sites don’t provide their fees without signing up and I am not willing to sign up I will take an example from wikipedia,
Due to the extremely short-term nature of payday loans, the difference between APR and effective annual rate (EAR) can be substantial, because EAR takes compounding into account. For a $15 charge on a $100 2-week payday loan, the APR is 26 × 15% = 390% but the EAR is (1.1526 − 1) × 100% = 3,685%. Careful reporting of whether EAR or APR is quoted is necessary to make meaningful comparisons.
Woah, 3,685%! However, if we were to compare those numbers to an overdaft fee they don’t look all that off! I had to search and search on chase.com and eventually had to contact customer support. The customer rep told me that the insufficient fee was $34! So figure out the EAR on going over your checking account by $5!
It should be noted that Chase also offers overdraft protection but that costs $12 a month when you use, making effectively the same as the wikipedia example.
I hope to never use a payday loan, but it doesn’t seem all that horrible if you are equipped with all the information. Am I missing something?