The loan is absolutely free, money on your account even in a few minutes, all without leaving your home. If you believe the ads, the companies providing “payday loans” dream of nothing but stuff your wallet with money without expecting anything in return. Is it even possible? Where’s the catch here?
There’s nothing for free?
Answering the question “Is it even possible” – yes, it is possible. Indeed, you can take out a loan and not pay a penny for it. In addition, in fact, in some cases, the money will be on your account in a few or several minutes, and all formalities will be handled online.
Nothing but take? Not necessarily. Especially if you are considering a loan in the context of your own business.
First of all, it’s hard to think of payday loans as a significant source of business financing. Free payday loans are given for quite low amounts – from a business perspective. Many of them reach barely 2,000 – 3,000 USD. Those that exceed USD 5,000 are rare.
Secondly, you can only count on the lack of commissions, fees and interest for the first loan in a given company. You will pay for each subsequent one according to the standard tariff, and this usually means that you will pay dear or … very dear.
Thirdly, the condition of non-payment is the timely repayment of the loan. Any delay and fees and commissions arise, and the promotional loan may become a loan granted on very far from the promotional, standard terms. And the standard rules are, as we just mentioned, high costs.
Hidden costs and delay penalty
In addition, when you want to know more about these costs, the stairs appear. Loan companies say as little as possible about it. If they have a free loan on offer, then standard loans are usually neglected on their websites. And in an open and concrete way, they provide only information about a free loan.
Open and specific, but nevertheless … short – to put it mildly. The condition that timely repayment is a condition, lenders usually mention no more than a half-lip. They are even less likely to reveal how painful the consequences of delay can be.
This information, as well as information about the costs of standard loans, are hidden in the regulations, model contracts or sometimes “answers to frequently asked questions”. Hidden and not very specific, because we will learn, for example, about the existence of a commission for extending the loan repayment time, but we will hardly know its amount. This lender will usually only present you when, in response to your request, you receive an offer of a ready contract. Quite late, considering that they can be even astronomical costs!
With such commissions, interest loses significance
APRC, i.e. the actual annual interest rate on quick loans regularly exceeds 100%, and often also … 1,000% (it’s a mistake – a thousand percent). Such highly elevated values are due to fees, commissions and the short time for which the loan is granted. As such, interest is negligible here; loan companies earn mainly on commissions and fees.
Despite the fact that the costs of payday loans in percentage terms are so high, it might seem that from time to time you can – or even worth it – to incur them. Example?
Let’s say that the customer is in arrears with payment of 5,000 USD for the goods, and you need cash for some reason. Suppose you can take a payday loan, interest rate 10% per annum, for which the commission is 15%. The total cost of such a loan is USD 792 (USD 750 commission and USD 42 interest).
There is no tragedy – after all, from time to time such costs can happen, right? However, think about how much of the margin from the sold goods you have to sacrifice. Maybe even the margin was lower than the cost of the loan? A reference to the margin can work on your imagination, but really … it should not decide whether it is worth taking such a loan.
The key to making a decision is comparing the cost of the loan to the benefits you will get from it. Or, if that is the goal, for losses that you will avoid thanks to it. In other words, you must answer one of two questions:
- Will the monthly (weekly, annual, etc.) costs of the loan be lower than the monthly (weekly, annual) revenues that you will realize thanks to the funds from the loan?
- Will it be possible to avoid a loss higher than the cost of the loan by taking out the loan?
So the question is: thanks to the loan, will you be able to earn at least USD 792 in the additional margin in the month, or avoid a loss of USD 792? It’s also (it’s just a delicate suggestion ?) to look around whether there really is a cheaper alternative. The cost of 15.8 percent per month may not be impressive – until we realize that it is … 483 percent per year !!
It is also worth, as with any loan, to ask yourself one more question: are you sure you can pay back the loan? Today you need 5,000, but in a month you will need 5,792 to pay back.
And if – knock on it! – it would turn out that you would be forced to “repay” it with another loan, granted on the same terms, in two months you will need USD 6 709. In this way, an innocent loan can begin to swell quickly, triggering a debt spiral – about which we will write soon.
Of course, such black visions do not have to come true – 5,000 by example, you may be able to get as part of a free, first loan. The question is, however, whether it is worth risking, having in view difficult to estimate in advance the costs of possible delay?
In addition, as we mentioned at the beginning, the amounts of free loans are quite low compared to the amounts that you usually need in business. Of course, you can try to outsmart the system and take out a few free loans to get the amount you need. But is it worth taking such a risk? If even by accident, you miss one of the payments, you will be noticed by considerable costs.