Cash advances are the obvious answer to some short-term cash needs. You generally can't borrow a small amount of money from the bank – you could borrow thousands to start a business, but not a few hundred to pay for an emergency dental procedure, for example. You may not have a credit card, or may not have enough on your credit card to cover your needs. Cash advance lenders, often called payday loan lenders, loan small amounts of money for a short time period to customers who can't get a cash loan through more traditional means, and charge a flat fee for their services. There are a lot of misconceptions about payday loans that can potentially scare off customers who really need them. Take a look at three cash advance loan myths and the truth behind them.
Cash Advance Lenders Charge an Unreasonable APR
The APR (Annual Percentage Rate) of a loan is the amount of interest that you pay on the loan over the course of a year. It may also include other fees that you pay as a borrower. For the average traditional loan, APR is a good way to determine how much the money that you're borrowing is costing you. Therefore, many people try to apply the same APR calculations to cash advance loans. When the flat fee of the cash advance loan is calculated as an APR, it often looks shockingly high, which could lead you to believe that the lender is charging unreasonable interest.
The truth is, the APR formula is not a good way to measure the cost of a payday loan. Payday loan lenders charge flat fees and not interest for a reason. When a bank charges interest on a loan, they expect to be paid back over a year or more. They can afford to charge a low interest rate, because when they're charging it every day over a period of years, they still make a reasonable profit from their services. Payday loan lenders loan money for short time periods – often as little as 14 days. If they charged the same interest as the banks, they wouldn't make more than a handful of change in interest before the customer paid off the loan. While that might sound like a great deal for you, the lenders would quickly go out of business if they began matching bank interest rates.
Charging a flat fee is a fair way to ensure that the lender can continue doing business and the customer can get a short-term loan at a reasonable price. And unlike traditional lenders, there are rarely any hidden charges with cash advance loans. You can pay it off early with no penalty, and you won't be surprised with a bill that's higher than you expect. Flat fees allow you to plan your repayment accurately.
Cash Advance Debt is a Never Ending Cycle
You may hear others talk about being "trapped" in a payday loan cycle. It's a common complaint. You have to pay the money that you borrowed back with your next paycheck, but that leaves you short on your next round of bills or living expenses, so you borrow again or renew the loan. That can be a problem for some people, but it doesn't have to be.
There are several strategies for paying off a cash advance quickly and without fuss. Don't borrow more than the bare minimum that you need, so that you can pay it off without losing too much from your next paycheck. Do odd jobs or work overtime between the date you borrowed the money and the day the loan is due so that you can pay it back easily. However, even if none of those things are possible, you don't have to stay trapped in a cycle of borrowing.
If you absolutely cannot pay back the loan without having to borrow again or renew your loan, talk to the lender first. They may offer reduced-fee options that you aren't aware of to help you get the loan repaid. And if you must renew your loan, renew it for less than the previous amount. You can pay the loan off in small doses if you have to by simply borrowing less each time.
Cash Advance Lenders Prey on Low-Income Workers
It's a common complaint that low-income workers are the ones stuck paying the high APR and becoming stuck in cash advance debt cycles. As you've seen, the "high APR" is really a misconception, and the cash advance debt cycle can be avoided or broken (and lenders are often willing to help with this). It's inaccurate to categorize cash advance lenders as predatory for these practices.
It's worth considering why so many cash advance customers happen to be low-income workers. It's not because cash advance lenders are predatory, it's because very few other types of lenders are serving the needs of low-income workers who need to borrow money. If you're a worker that doesn't qualify for a bank loan or a credit card, you have few other options. Payday lenders offer an option that is reasonable for many people in this position, and is often preferable to going without a needed medical procedure or allowing a utility to be shut off for lack of funds. Cash advance lenders are filling a need that most other lenders do not attempt to fill.
Sometimes, it's necessary to borrow money. If you're in need of a short-term loan, you shouldn't be frightened off by myths about cash advance lenders. A cash advance lender in your area might be in the best position to help you solve a short-term cash flow problem.