When you need credit in any form yet have bad credit, you are going to be reliant on sub prime lenders for your finance needs. A large sector of borrowers are concerned with improving their credit score and when applying for credit cards can often be charged high interest rates of above 20%. However if the credit card balance is paid in full by the due date then the credit has cost nothing. You may however pay an annual fee for holding a bad credit card.
If you hold a standard credit card and even qualify for an introductory offer of 0% APR you can still fall into a trap of paying for the credit you use. Just one returned payment or late payment will typically bounce you straight from the 0% rate to the penalty APR rate of usually around the +25% rate, and also cost you a fee. If it is a returned payment fee you incur you are usually looking at $39. Don’t forget too that if your payment is returned then you will most likely end up late with your payment, adding a late payment charge which typically range from $15 to $39 dependant on the amount of your balance.
However APR’s can be totally misleading to many. A penalty APR of +25% on a credit card looks exceedingly cheap in comparison to the APR on an average payday loan. By law payday loans must declare their APR’s upfront, and as you look at some online rates it may appear daunting to see rates of 242.73%, 485.45%, 651.79% or 1303.57%. It is indeed misleading as both the 651% and 1303% rates will both cost you exactly the same on a payday loan. If that sounds confusing read on for the explanation.
Payday loans have a bad name due to usurious rates, which is exactly the same problem which users of sub prime bad credit cards have been facing until the current reforms were brought into place. Borrowers who use payday loans as an emergency cash advance, as they are intended to be used, borrow a set amount for a set fee which is then repaid in full from the next pay packet. If this agreement is adhered to the borrower knows exactly how much they are due to repay.
As a typical example a payday loan customer will borrow $100 to repay on a pay day. The fee to do so will be a standard $25. When the borrower repays the loan he will repay $125 to the payday lender. Their business is completed. If the same borrower had used their credit card for $100 but their next pay day fell due one day after the due date on the credit card, so repaid it one day late, the typical late payment charge on the same $100 would be $29, thus the borrower has saved money by using the payday loan instead, and won’t be subject to interest on the balance of $100 on the credit card.
The borrower who opted for the pay day loan instead of the credit card debt has just been charged 651.79% APR, if he repaid the payday loan in 14 days. If he only needed it for a week he paid 1303.57% APR. In actual fact the sum he paid to borrow the $100 remains the same regardless of the APR, and it cost $25. The APR’s only come into play and cause debt if the payday loan is misused and the borrower fails to make the agreed payment on time, and starts to roll the loan over. APR’s are simply calculated in different ways and if the intent and ability to repay the amount borrowed is adhered to the APR’s are pretty meaningless.
As a final point if the person was trying to re-establish their credit rating then a temporary emergency paid for on the credit card and not repaid in time would have thwarted the whole purpose of having the credit card, whilst if the same borrower had elected to deal with the emergency by using a payday loan at the exorbitant interest rate, it would have no bearing on their credit score.