WARNING! Payday Loans Are a Bad Deal... or Are They?

The FTC is at it again trying to justify their existence by waving a red flag "consumer Alert" that proclaims Payday Loans = Costly Cash. To justify this alarming statement, this government agency uses only the APR or annual percentage rate and ignores all other considerations.

For those who don't know, a payday loan is simply an advance on your next paycheck. These are available online and throughout the country and are offered to help consumers who run into an emergency situation that need cash fast. These payday loan services, and literally deposit into any working persons bank account the proceeds of their loan within hours.

The typical cash advance or paycheck advance loan is not designed as a long-term financial tool. They are set up to help you over rough spots caused by unexpected expenses like an auto repair or health emergency. Payday loans typically are due to your next payday which for most of us would mean within two to four weeks.

We all know that when we buy products in bulk, the price is cheaper than what we buy smaller containers of the same product. The same is true with payday loans.

A payday loan usually is anywhere from $200-$500 dollars. In the lending business is a very small loan. It's reasonable that service providing these very small loans would naturally be more expensive than a lender doing larger loans.

When you're in an emergency situation and need money fast, don't look for your local bank to be able to get you a small loan in a couple of hours. Payday loan services can deliver your money, literally within hours after you apply. Unlike a bank that needs to run your credit report and have your loan approved by several people and sometimes a loan committee, the payday loan service only wants to know if you have a job.

Finally, consider the cost of many things that we buy. Consider that when you buy something, the price you pay can be broken into two parts. The first part is the actual cost of the product and the second is a markup. The markup is the difference between the actual cost of the product and what we pay when we buy that product. A markup is the money that a business uses to pay employees, rent, and other cost of running the business along with hopefully a profit.

Payday loan fees vary from business-to-business, but are generally around $25 dollars for every $100 dollars borrowed. This means there's a 25% markup on a loan that's payback in the agreed upon time.

This looks downright reasonable, next to many businesses. It's not unusual for a business to have a 100% markup or more on what they sell. The cost of a meal at a restaurant is a lot more than what food actually costs. And some products like jewelry can have 200% or 300% markup or more.

So when you look at a payday loan as a service used in an emergency that's payback on time, the actual interest and fees are really quite reasonable. I would disagree with the FTC that Payday Loans = Costly Cash when used responsibly by us as consumers.

I do agree that pulling over a short-term payday advance loan as a long-term financial strategy can be very expensive. The use of a payday advance loan in an emergency situation and on for a short period of time can really be a lifesaver.

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