Basics of Payday Loan: Why Short-term Loans are ExpensiveInk Well Mag September 17, 2015 0 COMMENTS
A lack of finances during times of disaster and emergencies immediately have people thinking about their loan options. Borrowing money is a lifeline in time of need, provided you are in good credit standing, but some people fall into the trap of acquiring and staying in debt.
This should not be so. To have a healthy credit score, GoCreditReport.co.uk advises monitoring what happens to debt. All of this involves learning how each loan instrument works, finding out about the interest rates and any profits from the loan, such as that of payday loans.
Payday loans mature within 14 days and is often a last-ditch remedy used by many. The problem is that it has unbearably high interest rates. But why is this so?
For cynics, short-term loans are easy cash for loan sharks. However, there is no real fortune from this type of business. There is actually a logical explanation why payday loans are high, according to financial experts.
Lending small amount of money is expensive
Consider what goes in the transactions with collectors and other personnel involved in the payday business. There are fixed costs, physical infrastructure and default rates that need to be paid. Lenders pay employee wages, commercial rents and website domains, which, minus the loan interests, does not account weigh much after all.
Short-time payments are not well-scattered
The arrangement fee makes it feel like paying in full is abrupt. Borrowing large amounts over the course of a long period is looked at as negligible compared to paying in one go. In addition, on top of the principal and default charges is the interest rate added on a daily basis. Compared to regular loans – the loans that first accumulate interest on a quarterly and yearly basis – short-term loans have a different interest rate table.
Lending for a short time is risky
Lenders have to contend with the wide range of borrowers without caring so much about their profiles. The risk of not profiting enough for a single client adds to the factors in compensating for meagre margins. Some payday loan businesses claim to have a mere 8 percent profit margin and an average interest of 15 percent on a principal of £1,000.
Learning the basics of loans is important in understanding financial instruments. While payday loan may be a burden to some, it is also a viable solution to financial dilemmas – but only to those who know how to use it to their advantage.