The trap to avoid when you borrow
You just checked with your bank. The fast cash advance you asked for was paid in at the start of business this morning. Problem solved. That was easy! Hey, never relax just because you managed to get a loan. You need to pay it off as fast as you can. Huh? Just in case you didn’t get round to reading all the small print, let’s look at the cost of one of these instant payday loans.
Suppose you borrow $100 and agree to repay $115 in two weeks time. The simplest way to think about interest rates is to see them as annual percentage rates (APR). So , if you had some savings, you would receive interests calculated on an annualized basis. If you’re lucky, you’ll get 2 or 3%. The APR for repaying $115 on a $100 loan is 390%. The psychology of borrowing is everything. You feel comfortable with paying $15 because it doesn’t feel much. The real cost is hidden. But, if you start to roll over the loans, what was hidden becomes all too obvious very quickly.
Suppose you look ahead and see that repaying the $115 on your payday is going to hurt. You make a telephone call and your lender agrees to roll over the loan. That’s another $15 for the additional two weeks. If your loan is outstanding after three months, you’re due to pay back $190. That interest really does mount up fast! The moral of this little example is that big interest payments really hurt. The major trap you fall into is being too casual. You need to put in the maximum effort to repay this cash advance before it gets out of hand. Payday loans are a great way of solving a problem when you’re in a bind. An emergency is an emergency. But the loan becomes an emergency in its own right if you just let it ride. The statistics show that households who take an online payday loan are likely to take ten more in each year. In other words, when you’re at the end of your financial tether, it’s very difficult to get back out of debt once you’ve taken the first loan.