True costs of payday loans
You have looked and decided that you are best off using a payday loan you think, but do you really know how much the loan will cost you? It is extremely important for consumers to have a very firm grasp of the entire picture so that you can see how much it will really cost you. We are going to use for example a payday loan of $500. This is an amount that is around the average 2-week paycheck for many consumers and is therefore a reasonable number to use. We are going to assume that we pay off the loan over the course of one year, which for a traditional loan would be only 12 months.
Under these circumstances, you are looking at paying 26 payments that are made every 2 weeks. This is gathered by taking the 52 weeks in a year and dividing it in half, which we then arrive at the number 26. From here, let us assume that you are paying an interest rate of $15 for each $100 that you borrowed. While all of these numbers may seem overwhelming, you are looking at a gigantic total of $1,950 just in interest alone at the end of the loan term. This means the total amount you will have paid at the end of a year is $2,450 or an incredible 390% interest rate.
Now if you decided that you were only going to pay on this loan for a period of 9 months you would be instead looking at a total interest charge of $1,350. Which while this brings the entire cost of the loan to a whopping $1,850 it is substantially better than the $2,450 that it would cost to hold the loan for an entire year. However, there is still yet room to improve and turn this even better in your favor.
Another example would be the same loan for a period of 6 months only. This still involves the original numbers of $500 for the loan and repaying $15 for each $100 that you borrowed. Now the interest charges add up to $900 with the total loan costing $1,400. As you can see the numbers are substantially lower, however it is still a lot of wasted money to continue renewing the exact same loan. If you were to only renew the loan for 3 months you would be looking at a total cost of $950 with interest alone accounting for $450 which is almost the same amount as the loan originally!
For a final look at this the same $500 payday advance carried for only a single term would only cost $575 with the interest only accounting for $75 of the costs. This is a much more preferred payment schedule and will allow you to free up your money for other bills and needs that you have. However, it is very easy to see how a consumer can become caught up in payday loans. Yet, if you take the time to really study your finances and compare all of the costs you can proceed into a cash advance with the plan and aim to repay it immediately which can allow you to get the cash you need quickly, without the struggles of paying astonishing amounts overall for the loan.