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Cash Advance Lending - Is It A Good Way To Borrow

Cash advance or payday loans are so named because they were intended to provide short-term funds to individuals until their next pay check. The people using these loans are the ones who live pay check to pay check and oftentimes find themselves unprepared for unexpected expenses or bills. Do you think these types of individuals are well equipped financially to be paying 400 to 700% interest on a loan? Should anyone, for that matter, be paying 700% interest on a loan? The answer is unequivocally "no."

To get a sense of how much interest individuals are paying on cash advance loans, take a typical scenario where they secure a short-term loan but are unable to pay the entire loan off in the next pay period. In fact, the average individual is far more likely to take multiple pay periods to pay these high-interest loans off. Now apply the typical interest rate for a payday loan to the balance that is being carried and you can see why borrowers could easily end up paying $1100 in finance charges on an original loan of $500.

A $100 loan will typically incur a finance charge in the range of $15 to $30 for a two week period. Payday loans typically range anywhere from $100 to $1000, depending upon the legal minimums and maximums set by states. The average loam term is two weeks but the average repayment term is much longer. After two weeks, individuals would have to repay the loan, any accumulated fees, and any interest that has accrued over that period. The typical cost of these loans is 15% or more in interest every two weeks. As many of these payday loans extend well beyond the typical two weeks, the annual percentage rate is much higher.

In almost any conceivable scenario, cash advance loans are going to cost the individual far more than any other type of loan. A credit card cash advance has a typical annual interest rate of less than 10% whereas a payday loan can exceed that in a single week on an APR greater than 400%. Studies have indicated that many people accessing these pay day loans donít stop at just one loan either. Hefty fees and finance charges only exacerbate their financial predicament and result in their taking more and more payday loans to meet expenses and cover fees. It can become a vicious cycle from which cash-strapped individuals have a hard time escaping.

When you highlight these costs, itís easy to see why states have taken measures to regulate this predatory lending practice. The target audience for these loans are the people who are the least equipped to bear the outrageous expense. Individuals are encouraged to reach out to creditors, service providers or utility companies in an effort to make payment arrangements or delay payments rather than taking on the burden of a cash advance loan. No one can or should afford 400 to 700% interest rates.