Cash meant for emergencies sounds like a foreign term to most people. When emergencies that need finances to get settled come knocking, many end up devastated, while those with credit cards rush to get cash advance loans. These loans can be accessed within minutes or at most 24 hours. Many who take up these loans end up paying a hefty price to fully settle them or in financial ruin due to the high-interest rates charged. Those with an idea or experience on how these loans work prefer to stay away from them until they run out of options.
Without an idea of how these loans work, you are likely to apply for these cash advances every chance you get. However, you might be digging your own financial grave in the process. To understand what makes these loans exorbitantly expensive, below is a breakdown of the interest rates charged.
1. Cash Advance Fee
Before your loan is approved, the lender looks into your credit score and verifies any other information provided. This process helps them determine the rates to apply to your short-term loan. However, some do not conduct this process with a keen eye, as most people looking for cash advances have lousy credit scores.
Depending on your lender, the fee can be fixed or as a percentage of the advanced funds. To ensure that you enjoy more affordable rates, you can compare rates charged by different lenders or brokers. When you have no idea how lenders and brokers operate, visit www.chron.com for a comprehensive explanation. However, do not make up your mind just yet. Some brokers and lenders offer low cash advance rates to attract customers but charge high rates on other types of interests.
Some firms require you to settle this fee whether you qualify for a loan or not. This is mainly considered as the processing fee. To the lender, this helps cover operating costs by covering all or part of the costs incurred while reviewing applications. Others only charge this fee to those whose loans get approved. They consider it as a processing fee. This helps reduce operating costs significantly, which in turn increases the profit margins.
2. Cash Advance Rate
Payday loans are floated by financial institutions looking to make a profit. These loans charge an APR of up to 30%, making them quite expensive. Additionally, the rates increase with the increase in the amount advanced, and you end up paying even higher rates. The rates do not offer a grace period as they are applied as soon as your loan is approved. Since most go for this option when they are cash strapped, you end up reducing your cash flow capabilities, leaving you at the mercy of these advances to bail you out a few days after paying them. To avoid these charges, consider using your debit card or making money transfers to pay for items. Additionally, avoid unwanted expenses when you can, as this helps reduce the charges accrued.
3. ATM Cash Advance Rates
A cash advance is deposited in a checking account, and you need an ATM to make the withdrawal. Charges accrued through this process include the standard ATM fees and cash advance ATM fees. This makes the advanced cash twice as expensive as each transaction is double charged. To reduce this expense, keep the rate of withdrawal to the bare minimum. Additionally, some lenders limit the amount advanced on a daily, weekly, and monthly basis. Knowing this, compare which option works for you and one that has the most affordable interest rates. However, avoid hitting your limits in unnecessary situations: you never know; the next emergency might be around the corner.
4. Defaulters Interest Rates
Despite the high interest rates charged, some people find it hard to settle this bill. Failure to meet your obligation leads to a penalty charge. The rates charged are determined by the amount owed, previous payment patterns, and APR. First-time defaulters with an impeccable payment record can be exempted from this for a while and even negotiate new repayment dates.
However, those with bad records cannot be trusted to meet their obligation. This rate is applied as soon as their repayment period elapses. Before this rate can be applied, the lender is allowed to withdraw funds from your account to pay the loan. In case of insufficient funds, the rate is applied. The approval to do this is always granted during the application process. Additionally, the lender verifies that the cash advance is only a percentage of the income expected. This helps reduce losses and ensure they can recover their funds in full.