Understanding Interest and the Payday Loan
Interest is the means by which lenders make profit off of the money they provide borrowers. While the basic premise is simple, the actual manifestations of this variable where different financial products are concerned can be very complex. Sometime high interest doesn’t mean more money and sometimes low interest doesn’t mean less. Counterintuitive though it may be, interest and the amount of money it adds to the principle of a payday loan varies dependent upon several circumstances.
Most interest rates today represent a percentage plus a variable that’s called the “Prime Rate”. The Prime Rate is usually published in one of the better-known business journals and represents the best possible rate one can expect to get on money borrowed. Most individuals will get a deal which is Prime Rate + n% where “n” is the amount of interest added by the lender. Sometimes this interest is fixed and sometimes it is variable. The Prime Rate, of course, will always be variable so one’s interest in these situations will vary, sometimes by the day.
When looking at interest rates, remember to keep the length of time the money will be borrowed in mind. For instance, if one is looking at a credit card with an APR—Xannual percentage rat—¡Xof 9% plus Prime Rate, which could easily be as high as 16% at times, remember that interest will accrue on the balance every day and that the debt is likely long-term. Though this rate may seem lower than some lenders, some peoplbecome trapped because they let the debt go on for too long and, thus, end up with a large balance simply due to interest.
Short term lenders oftentimes have interest rates that seem high but, when the length of the payday loans is taken into consideration, actually prove themselves to be very affordable. The time involved is the reason these terms are affordable. The very basic formula for calculating interest is principle = (time * % interest). If a payday loans online comes with a high interest rate, remember to take into account how long the money will be financed. If it’s only for a matter of days or weeks, the rates are often comparatively better than they would be with a loan from a credit card or a revolving account.
As to why interest exists, it’s because the lender is giving money to the borrower that they could otherwise use for their own investment. This constitutes something of a loss to the lender, as they could have made money for themselves by putting that money into various financial devices. They’re betting the borrower will turn out to be a better investment of their money, hence the need for their profit.