The Pros and Cons of Cash Advance Loans
Posted on Friday, October 16th, 2009 at 5:50 pm in Financial Planning, Helpful Payday Loan Info
It’s a good idea to be aware of the advantages and disadvantages of a cash advance loan before you commit yourself. With the right information in hand, you’ll be in a better position to make a balanced decision about whether this is an appropriate financial product for you.
Both the CFA (Consumer Federation of America) and the FTC (Federal Trade Commission) have raised concerns about the cash advance or payday loan industry, using terms such as “legal loan sharking” and “predatory lending”. They say cash advance loans are too easy to get, and too pricy, and that they force a large number of financially vulnerable people into a dangerous debt cycle. It is true that many borrowers have trouble paying back their payday loans and end up with an even bigger debt thanks to the new fees that get tacked on every couple of weeks.
On an annualized basis, a cash advance loan is usually a lot more expensive than other types of loan such as an advance on your credit card or a bank loan. Lenders are required by the Truth in Lending Act to provide the APR or annualized percentage rate of a loan – which makes it easy to compare it with other loans – in addition to the basic finance charge.
Many cash advance companies don’t do this, however, and some of their customers might take out loans without realizing the full implications of, for example, a $20 per $100 loan fee. With a payday loan, this means that you pay $20 for every $100 you borrow, every two weeks – not every year. The APR on this loan works out to 520% – that’s the interest rate you would pay if you held the loan for a whole year. Although it’s very rare to keep a cash advance loan for that long, this shows how expensive they can be unless you pay them back quickly.
So if they’re that expensive, why would you want to get a cash advance loan? Well, they can be great when you need some cash in a hurry to cover a hospital bill, a home repair or some other sudden emergency expense. A lot of people, even those with poor credit or who have filed for bankruptcy, and who have no assets to offer as security, can get a cash advance loan. You can access your loan within a day, or even within an hour if you get one from a walk-in lending store.
If you pay the money back within the standard two-week loan period, it can be cheaper to take out a payday loan than to bounce a check if your bank account is going through a dry spell while you’re waiting for your paycheck to be deposited. Your bank will charge you $25-35 in NSF fees and the same again in overdraft fees each time you make an unauthorized withdrawal or write an unsupported check. In comparison, you take out a two-week loan and pay $15-20 for every $100 you borrow.
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