3 Reasons to Avoid Advance Loans
It’s the end of the month, the bills start piling up, and you exhausted your budget. As an act of desperation you get an advance loan from a bank. You feel relived after paying your bills, but you realize that you won’t be able to pay the loan back any time soon and you’re not the only one who knows it. The bank is also hedging their bets that you probably won’t be able to pay off the amount on time. These types of loans carry outrageous fees and interest rates so the lender is hoping that you will carry the loan over for a few months.
According to CNNMoney, Wells Fargo, U.S. Bank, Regions, Guaranty Bank and Fifth Third Bank, are among the banks offering advance loans through direct deposit. Banks call these loans Checking Advance Loans and Ready Advance Loans.
An advance loan is a high interest loan against consumers’ next paycheck, much like the payday loans offered online and at store fronts. Banks and other institutions guarantee that these loans are safe, but often times advance loans only trap consumers in a cycle of debt. Advance loans and payday loans work in similar ways; the difference is that when taking a payday loan, consumers usually write a post-dated check that will be cashed as soon as they receive a paycheck. While in the case of advance loans, the bank withdraws money from the customer’s account to pay itself back with the next incoming deposit.
Experts at www.missmoneybee.com will tell you why you shouldn’t get an advance loan:
Outrageous fees: Advance loans have a negative impact on the consumers’ finances because borrowers can’t pay back the high fees that loans carry. A report found that bank advance loans carry a fee of $10 per $100, and consumers stay in debt for an average of 175 days per year, according to CNNMoney. Non-bank loans are worse! They have a $16 fee per $100, and consumers stay in debt for an average of 212 days.
Vicious debt cycle: Advocates argue that when it’s time to pay back the loan, consumers have to choose between paying basic expenses and paying the loan. It’s logical that consumers use their paycheck on expenses such as rent, utilities and food, so in order to pay the loan they obtain another loan. Loans become a problem when consumers don’t pay on time. If this is the case, interest rates increase and as time goes on, it only gets harder to save enough money to pay off the debt. That’s how many consumers enter a vicious cycle of debt.
High interest rates: Advance loans are misleading. When consumers first go to the bank or to a financial institution, they may think that it’s easy to pay back a loan that represents the same amount as a single paycheck, but they are not taking into consideration the high interest rates that these types of loans carry. The annual percentage rate ranges from 365 percent to 417 percent, depending on where you get the loan. Getting behind on your payments could cost you much more than one paycheck!