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by
David Berky
You have seen them on the
corner and in the poorer parts of town with names like "Quick
Cash", "Quick Loan", "Payday Loans", "Car Title Loans". They
are starting to sprout up all over the country and will soon
rival Starbucks for sheer number of locations.
They are the new trend in predatory lending practices but
still manage to fly under the radar of regulation in most
states. They don' t charge interest, they charge a "fee".
But it sounds like the ultimate in convenience. Need some
quick cash - stop by and in just five minutes you can be out
the door with $100, $500 even $1000 dollars. But what is the
true cost of this "convenience"?
How It Works
A cash advance or payday/paycheck loan is usually secured by a
personal check. Some companies want your bank account or
credit card information in addition to or instead of a check.
You write a check to be cashed or agree to have an amount
withdrawn from your bank account sometime in the future;
usually 14 days (the standard payroll period).
After completing the agreement/contract you are given an
amount that is less than what you have agreed to pay. The
difference is the "fee" for the loan service. And you have
got your cash!
Why It Works
Why is the company willing to loan you money like this?
Simple, because loaning out money for these "fees" really
amounts to a huge profit at your expense.
For example, say you borrow $200 and the lender charges a
"fee" $15 for each $100. Within 14 days you will have to pay
$230 for borrowing $200. Now if the $200 keeps you from
having to pay a $100 late fee or penalty on something it is
probably worth it. But if you just want the money today, you
are paying a high price.
You are paying 15% interest for a 14 day loan. That amounts
to 3785% compounded interest yearly! No wonder lenders are
happy to loan you this money. If they loan you $100 and you
pay them back with an extra $15 in two weeks and they loan out
the $100 again along with the $15 extra you paid, and they
keep doing this for one year, they will turn their $100 into
$3785 by the end of the year!
Maybe you should be loaning your money to them rather than
borrowing from them.
What To Watch Out For
- Early repayment fees. Pay
off your loan early and they sock you with another fee.
- Late repayment fees. You
may have to pay the entire fee again if you miss the payment
date.
- "Membership" fees. Some
companies charge you to become their customer along with
charging you as their customer.
- Giving lenders access to
directly debit your bank account. Just hand them your
wallet, it's quicker.
- Fine print (as in all
contracts). Know what you are signing or don't sign it.
- Bounced check or debit
fees. Make sure you have money in your bank account or you
get to pay your bank a fee as well.
- "Collateral" requirements
such as a car title. Miss your payment and you may be
missing your car - permanently.
There Is A Better
Way
The root problem here could be that you are getting strangled
by your debt payments. Credit cards, store accounts,
installment payments and such can eat up your income quickly.
Ite may be time to visit a non-profit credit counseling
service or create a debt reduction plan for yourself.
Or it could be that you are just spending more than you make.
You may need to spend a few minutes each week and write down
your expenses. Then categorize and total them to see where
your money is going. Then record your income for the same
time period and make sure that you are not spending more than
you make.
Sure, everyone gets behind occasionally. But you need enough
room in your budget (this means spending less than what you
make) to accommodate the "budget busters" and surprise
expenses that may come up. It may mean cutting back on cable,
magazine subscriptions or eating out. But last time I
checked, McDonalds did not charge a $15 "fee" for making your
food.
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© Simple Joe, Inc.
David Berky is president of Simple Joe,
Inc. which sells the Simple Joe's Debt Eraser PC software.
Debt Eraser can help anyone get out of debt quickly and
inexpensively by creating a
Rapid
Debt Reduction Plan. This article may be freely
distributed as long as the copyright, author's information and
an active link (where possible) are included.
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