Payday Loans and High Interest Rates - Understanding the REAL Numbers

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Payday Loans and High Interest Rates
Understanding the REAL Numbers Loans

When deciding to take out any kind of loan, or line of credit it is important to understand ALL of the costs and fees associated with the money you are borrowing. For example, some experts say one of the reasons behind our current foreclosure crisis, is due to the fact that people didn't understand what type of mortgage they were taking out. One of the mortgage products that a lot of Americans got in trouble with were adjustable rate mortgages (ARM). While these mortgages helped a lot of people have low payments in the beginning of their mortgage and helped to qualify people for a larger loan amount, most of these borrowers failed to understand the fact that their interest and payments could go up tremendously once the ARM was allowed or due to readjust or the ARM payments were negative, meaning the payments borrowers were making were only going towards interest, and not to paying down the principle, or original home price.

Another example is the importance in understanding credit cards and how their interest rates work. Most credit cards will entice customers to open a line of credit or transfer a balance with 0% APR, or interest, for the first year. While this is great if you always pay off your balance yearly or monthly, it is not so good after that year of 0% APR runs out, and interest is immediately applied on the continuing balance or future purchases on that credit card. Also, in order to recoup the fees lenders have "lost" on not charging you a year of interest, the second year of interest can double average annual interest rates on other credit cards. Also, credit cards will often increase their interest rates. And once they give you notice of the rate increase, unless you call and opt-out and close that credit card and pay off the balance, credit card companies will often continue to charge you interest on your balance at the higher amount. Credit card companies also retain the right to raise your interest rates and anytime and often do if you are late for a payment more than once in awhile.

Payday loans are no different than any other loan product. It is important to understand how the fees work in order to avoid paying extremely high amounts of interest. Payday loans are set up to be paid off by your next payday. That means not only do you have to pay of the money you borrowed, or your principle, you also have to pay off all of the interest and fees. Most payday advances charge approximately 15% to 30% of the total money borrowed. For example, if you borrowed $500 at an interest rate of 20%, you would owe $600, by your next payday. While this isn't a great rate interest rate, it isn't as high as some other loan products. The problem with payday loans is that very few individuals pay back their payday advance by their next payday or can only afford to pay off some of it. The lender then has to roll the loan over and often charge an additional 15% to 30% on the new balance. In some states the lender can keep rolling or extending the loan until the person has paid it off, which in the end can cause people to spend more money on just interest.

For more reasons people get stuck with payday debt, click here

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