Payday & Title LoansPersonal Finance
Payday, Title and Advance loans all have similarities to regular banking loans. Payday and Advance loans are repaid by the reception of your next paycheck(s). A title loan is secured by a piece of collateral, usually an automobile or motorcycle, much like many bank loans. The item posted for collateral must be clear of all liens. Title loans will also be repaid over time with your paycheck.
However, their cost is substantially higher than regular loans. Fees will start at 15% and go all the way up to 50% of borrowed fees. If you are late these fees will rise substantially. If you default the collateral attached to the loan will be seized by the company.
Payday loans are ultra-short term and for low amounts, but the amount of fees and interest charged is astronomical compared to most loans. Payday loans typically charge up 15% to 25% of the initial loan value in financing fees, and then charge an actual annual percentage rate that can range from 250% up to an insane 700%. This makes a payday loan horrendously expensive even when compared to the worst credit card rates. They drastically overcharge in fees and interest.
Title loans are similar to payday loans. They charge financing fees for the loan which range from 8% to 25% of the initial loan’s cost. Afterwards they charge a rate of 15% to 30% of the loan’s value per month. Always ask for the annual percentage rate when dealing with any financial loan. The title loan’s interest rate usually carries an annual percentage rate ranging around 300% (or more) per year. Very rarely does the principal lent to the borrower exceed more than 40% of the car’s total value. This means if you fail to pay the loan the lender seizes the car and keeps your previous payments. They instantly gain the 60% value difference between the principal value and the car’s total value as well as keeping your insanely high fees, interest payments, and previous principal payments made.
Interest Only Loans
Both payday and title lenders will often attempt to push you into an interest only loan. These loans require a month to month or indefinite payment which only pays the interest. You will never, ever, pay the initial principal unless you send them a check specifically for that balance. As an example, let’s assume you borrow $1,000 on an interest only payday. You incur financial fees which total 20% of the loan balance for $200. You have a monthly interest rate of 25% ($250 per month) that you don’t let accumulate since you pay off each month’s interest. Due to economic difficulties you cannot repay the principal until 6 months later and only repay the recurring interest. You will pay the financing fees of $200, 5 interest payments of $250 for $1,250, and finally the $1,000 principal. This comes out to $2,450 for a $1,000 loan only 6 months later.
In general, both payday and car title loans should be avoided at all costs. They are not worth their expense in fees and interest costs. It’s far cheaper to simply borrow the amount needed from your local bank or credit union, even at higher rates. It’s even shockingly substantially cheaper to simply use a credit card, which isn’t recommended unless absolutely required.
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