The True Rates of Cash Advance Loans

Most people that are interested in getting cash advance loans will always look at the positive of the product before weighing in on the down-sides. Granted the level of accessibility and convenience of cash advance loans make them very appealing but you should also be very aware of the costs (sometimes hidden costs) associated with using cash advance loans or even worst, to use them regularly.

In most payday or cash advance loan arrangements, the borrower is asked to write a post dated check for the amount that they want they want to borrow plus whatever interest rates or fees that might be applicable for the loan. Generally, the rates is about 17.5% for the duration (normally one month) meaning that in order to obtain a cash advance loan you must write a check for $117.50 to obtain a immediate loan of $100. If you want a loan for $500 then you need to write a check for $587.50 which will be cashed by the lender on the date that you have specified on the check.

Based on the 17.5% rate that we have discussed above, the annualized rates amounts to a staggering 212% assuming you take the loan for the full 30 days. The rate gets worst if you take the loan in the middle of the month meaning that the 17.5% is charged for 2 weeks worth of loans, meaning a staggering rate of 456% per annum. Looking at these rates annualized shows us how expensive cash advance loans really are. Most borrowers or even merchants would never dream of entertaining loans at these rates however most still do when their cash flow situation takes a turn for the worst.

Although the rates that I have mentioned above are generally on the high side, it still illustrates the point that annualized interest rates should be what you look at first. The small extra that you pay for the loan might seem small at first but can very quickly turn large if you aren’t careful with paying off the cash advance loan in a timely manner.

The important thing to remember is that cash advance loans are loan facilities that should only be used when there is no other option to obtain money. They should be used very sparingly and not be something that you rely on persistently in order to get by. Many people who are not financially trained do not see the danger in interest rate traps. An loan trap of an interest rate spiral is when you find yourself short when time to pay off a loan. You then take out another loan to pay off your first loan completely or partially. Theoretically there isn’t a problem with this but you must be aware that now you are exposing yourself to double the interest rate payments and liabilities that you already have with the single loan. If you can’t pay again and are forced to take out another loan then you are in real trouble as the interest rate exposure at this point is simply too high.

There is one hard and fast rule when it comes to payday or cash advance loan products, to only use them when you really need them. You need to carefully consider that you are paying extremely high rates which you could use for other more important things. Never rely on cash advance loans for long term financing.