3 Reminders about the Default Percentage Regarding Payday Loans

[Jul 6, 2009.]

 

What consumers know regarding the default percentage regarding payday loans is vital to responsible borrowing. We’ve all heard the nightmare stories about 700 percent annual percentage rates (APRs) and higher. But the truth is that keeping three basic APR concepts in mind can open the possibilities of financial relief through payday loans.

1. How to Figure the APR of Payday Loans.
The math behind the default percentage regarding payday loans is very basic--yet critical to master. The Department of Agricultural and Consumer Economics at the University of Illinois at Urbana-Champaign offers key insight into how to figure the APR of a potential payday loan. The process can be completed in two basic steps.
Step One. Change the two-week fee (standard for most payday loans lenders) into a yearly charge by multiplying the payday loan fee by the number of periods (two-week segments) in a year.
Step Two. Divide the yearly charge by the amount of the loan and times that number by 100 percent to figure the default percentage rate.

2. Consider Both the Short and Long-term Costs of APR.
ResponsibleLending.org reveals the short and long-term effects of payday loans. The short-term can be defined as one, two-week loan period. In the short-term, payday lenders typically quote a simple interest rate (about $15 per $100 borrowed) that can seem enticing. Repay in the short-term, and the cost is minimal.

In the long term, acquiring several payday loans can prove difficulty. An analysis of Advance America's financials conducted by Morgan Stanley shows that 38.1 percent of customers took out 9 to 14 or more advances per year. In other words, continuing to borrow payday loans over time increases the chances of debt cycle.

3. APR is a Killer When Rolled Over.
Here’s where borrowing gets risky. Consumers activate a payday loan to cover an emergency expense--auto repairs, medical bills, home maintenance, etc. When the loan term expires and there’s not enough in the checking account to cover, some borrowers roll the balance over into a new loan, doubling the costs. This tendency to double-down also encourages a cycle of debt. According to ConsumersUnion.org, when the default percentage regarding payday loans doubles, that can be cause for alarm.

The Bottom Line. When considering the default percentage regarding payday loans, understand that paying on time removes the threat of becoming trapped. As with any responsible financial transaction, knowledge is vital to making it successful.

 

About Author:

Kelly Richardson is a freelance writer, marcomm consultant and digital entrepreneur. He’s written content for Fortune 500s Google, Yahoo!, Microsoft and Wells Fargo. Find out more about him at kellyrichardsoncopywriting.com.