Cash advance companies loan money to working people to tide them over until their next payday, usually in the amount of a few hundred dollars. To pay off the loan, the borrower writes a check that is post-dated for the next payday. When he or she has money in the bank, the cash advance company cashes the check. Often there is a service charge of about $15 for every $100 borrowed.
For people with bad credit and no credit cards, this is the easiest way to borrow money during difficult financial situations. This form of lending has become very popular, and cash advance is a $45 billion industry in the United States.
At first glance, cash advance companies seem like an expensive way to borrow money. When you calculate the annualized percentage rate (APR), some payday loans come out to 250 percent and even close to 400 percent APR. Compare that with 20 percent for a credit card and it quickly looks unfair. But there's more to the story than that.
From a lender's perspective, there's no reason why they would charge what a bank or credit card charges in interest. For example, if a cash advance company lent one hundred dollars to someone for one week and charged 20 percent interest, it would only yield them 38 cents. That's not much of a profit.
Although we don't realize it, there are other charges that we encounter quite often that also turn out to be very high APR rates. For example, if you bounce a $100 check, you will incur overdraft fees and perhaps a merchant fee that could add up to a $48 charge. That works out to 1,250 percent APR. "If you're late paying your $100 credit card balance, you could be charged $26, an APR of 678 percent," according to John Matthews of Big Cash Advance. Taken in context, cash advance companies offer a worthwhile short-term solution.
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