Save Money By Fixing Your Interest Rate
In this article, you will discover, how the interest money you pay is calculated and the simple formula of finding out exactly how much interest you are paying for that loan, whether it be a payday loan or any other loan.
This information will help you to determine how you could manage your money, instead of the loan interest managing you.
Many people are one step away from bankruptcy and, in a lot of cases, due to their lack of understanding of the way that the interest rate on their loan works.
Sounds dramatic! But sadly there are a lot of people who have fallen into the black hole of debt entirely because of the interest they have been stung with!
The following video and text are related to Payday Loans and how interest is accumulated by the money lenders.
(You can relate this to any loans but I’ve used Payday Loans as an example because of their very bad reputation.)
When you are in debt, you don’t think about the interest, just the immediate relief of getting hold of some cash! Everyone one of us has been in that position at some time or another.
You should watch the video first and then read the text. This way you will be completely familiarized with all the facts. Then, you will be able to make an educated decision, should you decide that getting a payday loan is to your advantage or not.
Perhaps the information will give you food for thought and possibly set you in the direction of getting help from other less expensive sources.
How Do You Calculate The Interest Rate on a Payday Loan
- A payday loan generally refers to a short-term loan of 1,500 dollars or less with a term of 62 days or less.
- Normally when you borrow money, say for using a credit card or for your mortgage, the interest rate you are being charged is known.
- For example, if you were borrowing money to buy your first house at the beginning of 2015 you probably know you could get an interest rate of less than 3%.
- You might clearly know that your credit card provider charges a fixed annual interest rate of say 19% but payday loans are advertised a little differently.
- Instead of telling you the rate first they tell you the dollar amount of borrowing. For example, it’s common to see ads that will say borrow 300 dollars for two weeks for 69 dollars.
A Breakdown Cost Of Getting A Payday Loan
- What you might not realize is that a cost of borrowing 300 dollars for two weeks for 69 dollars is the equivalent of a 599.4% interest rate.
- Here’s how to figure that rate out.
- Take the cost of borrowing 69 dollars and divide that by the amount borrowed 300 dollars.
- This gives you the interest rate for the period of the loan.
- This simple interest rate is 23%. Now you have to convert that into a simple annual rate. (Payday loans are not allowed to be compounded continually.)
- To do that we have to figure out how many of these two-week periods fit into a year. Your first instinct is to think, ‘well there are 52 weeks in a year so that’s 26 to week periods.’
- Multiply 23 percent per two-week period by 26 to get 598 percent but that’s not actually the exact formula used!
- Non-leap years have 365 days but note that 52 weeks multiplied by seven days per week is 364 so the exact formula requires using a more precise number.
- To figure out how many two-week periods there are in a year we divide 365 days by 14 days to get 26.0714, we then multiply this by the interest rate for two weeks of 23% to get a simple annual percentage rate of 599.64%
Let’s see another example!
- Let’s say you were borrowing 200 dollars with a cost of borrowing of 44 dollars and you’re only borrowing for 10 days.
- The rate for the period is 44 dollars divided by 200 dollars or 22%. The period is 10 days.
- To figure out the simple annual percentage rate we need to multiply 22% per 10 days, by the number of 10 day periods in a year, which is given by 365 days divided by 10 days or 36.5.
- Now we simply take 22 percent and multiply by 36.5.
- This gives us a simple annual percentage rate of 803%.
- So, borrowing 200 dollars for 44 dollars over 10 days has an annual percentage rate of 803% and now you know how to calculate the annual interest rate equivalent on a short-term payday loan.
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The above example of the payday loan interest rate is in dollars and I have purposefully not added the dollar symbol as the information can relate to all denominations of currency.
Note the mention that Payday Loans are not allowed to be compounded continually! But they have gotten around this ruling by allowing several Payday Loans to the same borrower.
In the main, people who take out Payday Loans are those who have no understanding of the amount of interest they are repaying. They are financially illiterate and go from one loan to another in total ignorant bliss.
Hopefully, once people know how high-interest rates are impacting their financial freedom, this knowledge will inspire them to take action to take the first steps to becoming debt free.
But it is our responsibility to educate ourselves. All it takes is the determination to be in control of our own financial destiny.
Payday loan borrowers have spent time and stress searching for companies who will fund their expenditures. Some of these may even be for unnecessary expenses.
Most of us would only go down the payday loan route if we were in dire straits and felt we had absolutely no other option.
Possibly, with the stress of being in debt, we allowed ourselves believe that we would pay it back on the date required but instead fell into a debt hole. It can happen so easily and that is exactly what the payday loan companies want!
Either way, surely it is about time that every single one of us took the time to educate ourselves on the interest payments and on how to become debt free.
Getting a loan today is just too easy.
I feel pretty sure if you tried to get a loan today, you would have no problem, even with a bad credit report!
After all, your being in debt makes a big profit for the loan companies.
By educating ourselves, we would then be able to guide our own children in understanding what taking out a Payday loan actually results in.
Our children could break the debt circle in this generation, putting debt problems into the past.
Some Responses To This Video and Others on Payday Loans:
“If you don’t have 300 now, what is the chance that you will have 369 in two weeks?”
“If you need the money urgently, ask your family or friends.”
“As a last resort it could be used but not more than once.”
“Many payday loans are rolled over from one institution to another and many people take out several payday loans in a year. The debt (including interest) is a black hole that many people can’t get out of.”
“YOU TAKE out a loan and then you blame THEM for giving it to you?! People, why don’t you use your brains before you do something. THEY will lend you money always, that’s how THEY make money. YOU have a choice if to take out a loan or not, though.”
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So, what choice would you take, now that you know how much interest (money) the loan companies would be taking from you?
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