Costs in payday loans
In the credit industry, generating commission income is downright mandatory for survival. Payday loan is one of the most popular products in private loan companies, but it’s worth knowing what costs it consists of and how it can be reasonably optimized. In the article we will talk about the most important costs in payday loans, as well as about the development prospects of the industry.
Cost analysis in short-term loan contracts
The main cost in payday loans is of course the nominal interest rate. Payday loan is a colloquial concept. It is not reflected in the laws. Payday loan can be said to be a consumer loan for a short period. The consumer loan act fits into the payday loan. The nominal interest rate reaches the maximum regulated values. It’s four times the pawnshop rate. The so-called anti-usury act. Nominal interest rates are usually not enough to cover the budget of private loan companies. For this reason, the borrower incurs large non-interest costs when establishing cooperation with the parabank. The main non-interest cost is commission.
What is the amount of commission? This is a function of the loan amount and repayment date. The longer the repayment and the larger the loan, the higher the commission and additional fees. It’s an industry standard. Additional fees in many cases exceed 100% of the obtained loan amount. In practice, it is usury and a loan granted on unfair terms. The Anti-usury Act, however, is evolving and probably in the near future non-interest costs will be severely reduced, which will ultimately lead to the purification of the short-term loans sector from unethical entities. Sometimes the borrower incurs the cost of establishing a collateral for the loan agreement, e.g. in case of poor creditworthiness. This cost is often a lot of the value of capital borrowed.
Additional fees found in payday contracts
In parabanks there are also fees for registration on loan services, fees for transfers confirming the borrower’s credibility, fees for any extension of the liability repayment date. Parabanks also apply their own limits for debt collection activities. If you do not pay off short-term loans, consider the excessive costs. The most important tip is strong cost control in payday contracts, as well as the use of only reliable parabanks with confirmed opinions by existing customers. Do you think that there is a deliberate inflation of the commitment costs in the payday loans?