I never thought about the sources of spam nor the types of spam until I started this blog. I must not have this site configured very well as I receive spam daily. I have tried to set things up to filter spam out but the spammers are actually much more clever. That is why today I am writing about payday loans.
I have been around and in some countries it is possible to have payday loans where the annual percentage rate is calculated to be the equivalent of 2600% and can even be advertised on the television. Wow, that is a hefty percent, boy am I glad that the USA doesn’t stoop to such business practices.
Well, I guess that last sentence was created with out a lot of thought or research. Of course payday loans are legal and I suppose even thriving in the land of the free. Not even in America’s heartland is it possible to escape.
What is a payday loan
A payday loan is a small short-term loan that is taken out with the intent of covering an immediate need that cannot be met with existing resources. Because this loan is a very short term it is expected to be repaid once you receive your next pay check. The average length of a payday loan is two weeks. A payday loan differs from a traditional loan in a few key points. A traditional loan is paid back in installments while a payday loan must be paid back in a single lump sum. Also installment loans are of a much longer duration ranging from months to years. The biggest difference of the two is the amount of interest paid for the privilege of the loan. A traditional loan interest rate is usually in the single digits while a payday loan is easily in the digits.
Wow, 100% interest? Nah, usually more like 400 or 500% interest but it is never really advertised that way. It is usually more in the way of a fee charged for the use of the money over life of the “loan”. I was looking at one such payday loan website to see just how much it might cost for a quick loan.
Finance charge. A finance charge will usually range from $15 to $30 per every $100 you borrow. If we use a two week loan as an example, your finance charges can cause interest rates grow to as high as 400-780% APR.
I guess they do advertise that the loan may have a 400% interest rate.
How to calculate APR.
For this example I am going to assume the following.
- loan amount of $250
- Fee of $20 per $100
- loan duration two weeks
Annual percentage rate (APR) is calculated with the following steps.
- Divide the finance charge by the loan amount ( 50 / 250 = 0.20)
- Multiply the result by the number of days in a year (0.20 x 365 = 73)
- Divide this result by the length of the loan (73 / 14 = 5.214)
- Multiply by 100 to make this a percentage ( 5.214 x 100 = 521.4%)
The APR is not quite so intuitive as the common but incorrect calculation of what is the cost of the loan divided by the amount of money ( 50 / 500 = 0.2 ) multiplied by 100 to make a percentage (0.20 x 100 = 20%)
Rational for a payday loan
I get why someone might get into a financial bind. The alternator on their car breaks on December 26 which is also the same month their second child was born. Unexpected costs are both unexpected and hard to cover.
The payday companies are charging more interest than a bank because they are not expecting to build a long business relationship and it is possible that you might not pay them back. They do need to cover their costs and be able to continue to stay in business but it does seem that a 50 dollar fee for a two week loan of 250 dollars is excessive.
Perhaps using the word loansharking is not quite accurate. That word tends to conjoure images of someone who might break your leg if you don’t pay the load or come up with the “vig” by the end of the week. I guess a more accurate word might be usury.
Usury
The practice of lending money at unreasonably high rates of interest.
During my research I found another source which does clearly describe the process.
