You might have heard of a payday
loan. Are you wondering what it is? Well, this article will give you much
needed information on everything you need to know about Payday Loan.
Payday Loan is also called paycheck
advance in some areas. As you can guess from the words, payday and loan, it is
a short-term loan that is intended to cover the employees expenses until the
next payday comes. These are what some may call emergency loans. The amount of
cash that you will borrow will be removed from your next salary. There are
times when people call these loans as cash advances. Though if we use this term
then it can also be related to the credit card industry. There are various
legislation regarding payday loans. It contrasts from one country to another
and in the case of the United States of America, from one state to another.
There are some states and countries
that strictly impose usury limits. They limit what is called the nominal annual
percentage rate (APR) which is the charge of the lender to the borrower. This will
be added to the debt of the borrower. We can also see the statistics side of
the situation. The effective annual rate (EAR) takes compounding into account
unlike the nominal annual percentage. For example, when a borrower decides to
loan an amount of $200 on a 2 week payday loan with a 20 percent charge there
is a significant difference between the computation of APR and EAR. When we
compute it using the APR then we will have a computation of 26 x 20 percent =
520 percent. However, when we compute it using the EAR then we will have a
computation of (1.226-1) x 100 percent= 11, 447 percent. As we can see, there
is quite a difference between the computations of the two rates so one has to
be careful when reporting whether each rate is quoted so that the computations
will be reliable and unquestionable. It will also be helpful to know these
computations when you are the borrower so that you will know if you are paying
the right amount of money.
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