The Cost Breakdown of Cash Advance Loans

Meant for emergencies only, cash advance loans are one way for people to get money in a hurry. Here is one loan scenario: Joe needs $100 to tide him over until his next payday. He writes his cash advance lender a postdated check for $100 plus the loan fee.

Lenders deal with fees in one of two ways. The first way is as an established amount per $1 borrowed—for example, $15 for every $100 borrowed. The second way is as a percentage of the borrowed amount—so, 10 percent of $100, for example. If Joe’s lender uses the first method, Joe’s check comes out to $115. He’ll get instant cash or an automatic deposit into his checking account. On his payday (the date on the postdated check), the cash advance lender cashes his check unless Joe extends the loan. This move, also called rolling over, incurs another fee and prolongs the life of the loan. It also means an additional fee.

Basically, the total cost of a cash advance loan depends on whether roll overs occurred, and if so, how many. Such loans can prove quite costly for many people who don’t exactly realize what a cash advance loan entails. A report in 2006 by the Center for Responsible Lending says that a typical borrower pays $793 in interest on a $325 loan. Why that much? Rollovers. Many borrowers are in continual need of money and start new loans to cover old ones. They can end up owing thousands of dollars.

Cash advance lenders are required by law to lay out the cost of a loan in writing before a customer agrees to it. The information must include the finance charge and annual percentage rate (APR). If a certain lender asks for $17.50 per $100 borrowed, that means an APR of about 640 percent on a 10-day loan. By comparison, credit card rates, while still high, are less.

Let’s go back to the Joe example. Suppose he does choose to roll over his loan after the two weeks are up. He’ll have to pay an additional $15 for another two weeks. If he ends up with three rollovers, he’ll have paid $60 in finance charges to borrow $100.

The rules are slightly different for service members and their dependents. The APR cannot be higher than 36 percent and fees and charges are included in the rate—with some exceptions. However, such loans can still end up costing a lot depending on if there are rollovers and how many.

Alternatives to cash advance loans include budgeting, credit cards, bank or credit union loans and negotiating with other creditors (mortgage company, utilities, etc.) so a cash advance isn’t necessary.

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