When it comes to what cash advance loans cost and how they work, keep in mind that short-term loan companies may have subtle processing differences, but there are regulations in place to keep lending fairly consistent. Cash advance loans are funds that a lender provides to a borrower to meet his or her immediate financial needs. Depending on the lender, this type of funding option may also be referred to as a payday, deferred presentment, delayed deposit or title loan.
What People Pay for Cash Advances
When compared to other types of loans, cash advances are a high-cost borrowing option. For instance, a cash advance for $950 will incur fees of more than $200 and accumulate interest of around $4 to $5 in just two weeks. The fees and interest practically double if it takes the borrower a month to repay the loan, and if it takes him or her three months to pay the money back, then the fees triple. When it comes to cash advances, the fees and interest snowball, and this is why it’s important for borrowers to pay these loans back quickly.
According to the Federal Trade Commission, when consumers borrow cash from a short-term loan lender, most require the individual to write a personal check for the amount of the loan and the expected fees. The lender will then give the borrower the loan amount minus the fees. In this situation, the lending company will hold the check until the payment is due. This is usually within two weeks. Today, lenders also provide funds electronically if a borrower gives the company permission to deposit the funds into his or her checking account automatically. In this case, the lender debits the borrower’s checking account on the payment due date.
How Lenders Determine the Fees for a Cash Advance Loan
Most lenders set the loan fees for a cash advance based on a percentage of the amount borrowed, or they calculate the fees using monetary increments. For instance, they may charge a certain amount for every $50 or $100 that a person borrows. If the borrower extends the payoff terms of the loan, then the lender would add a new fee.
With the Truth in Lending Act in place, short-term loan lenders must disclose the loan’s cost. This means that the lending company is required to share the finance charge amount and the annual percentage rate, or APR, with the borrower. These figures must be presented to the borrower in writing before he or she signs for the loan.
The Fine Points of a Cash Advance Loan
Cost Helper confirms that consumers receive the funds that they borrow through a cash advance loan quickly. Approval generally happens within several hours, and almost all of these kinds of loans go through quickly. Cash advance loans are easy to get while the amount obtained is typically smaller than the fund amount that borrowers apply for from banks, credit unions or other financial institutions.
Most cash advance loan lenders require the borrower to prove that he or she is employed. Borrowers must also show identification and have a checking account. Today’s cash advance lenders frequently operate online. In fact, they usually do so 24 hours a day. To process a loan online, borrowers fax the supporting documents to the lender. Once the funds are approved, the lender transfers the money into the borrower’s checking account directly.
Are Cash Advance Loans a Trap?
The Center for Responsible Lending alleges that short-term loans trick borrowers into a debt trap. To come to this conclusion, the agency used an example of borrowing $300 that comes with a $50 fee. If the person who borrows the $300 extends the loan nine times, which is the average amount that borrowers roll them over annually, he or she will pay an estimated $450 in fees while continuing to owe the initial $300. Some states have made the lending practice illegal while others have enacted strict limits on cash advance loans.
Other Costs that May Come with a Cash Advance Loan
If a borrower’s checking account doesn’t have enough funds to cover the lender’s automatic withdrawal of the payment, then the bank will charge the borrower a bounced check fee. Depending on the financial institution, these fees range from $20 to $40 per check. The lender may also charge an additional fee when checks fail to clear. By knowing what cash advances cost and how they work, borrowers can make sure that they’re using them in ways that are helpful instead of harmful. To learn more about cash advance loans, visit the Personal Money Store.