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Buying Money for Christmas
In our world of major credit cards, in-store credit cards, cash advances, bank loans, home-equity loans, payday loans, and title loans, it might seem like people are constantly throwing money at you. The reality is, though, that any time people use credit to purchase something, what they're really doing is buying money. Sounds ridiculous, doesn't it? Why would anyone pay for money?
There are times when buying money (or, as it is more commonly worded, "using credit") makes sense, but most of the time, it really doesn't. More often than not, the people who "buy money" by using credit are people who don't have enough money to begin with. That just makes a bad situation worse. How much worse depends on how much the lender (i.e. money seller) is charging for the credit. An average Annual Percentage Rate or APR would be around 15%, which means that if you were to borrow $100 for a year, the seller would charge you $15 for that $100, and your total bill (including interest and fees) for the money would be $115. Depending on the card, your payment history, and your credit score, though, most cards charge anywhere from 6% to 30% APR. Loans through banks and credit unions (such as signature or car loans) tend to be even cheaper.
We've already explained how payday loans get around usury laws by charging "service fees." When those fees get factored in as part of the cost of a payday loan, the APR soars. According to Pew Charitable Trusts, the average APR for a payday loan in Kansas is 391%. In other words, if you borrow $100 from a payday lender for a year, you'll pay $391 in interest for it, bringing your total bill for that $100 to almost $500! And we're lucky that Kansas law caps those service fees. In states like Texas that don't have legal limits on the service fees, the APR for payday loans can and sometimes does exceed 1000%.
As a bankruptcy attorney, I see the real financial harm that payday loans often inflict on people, so as a Christmas present from me to you, here's a bit of free advice: never use payday lenders. The worst credit card out there is so much better that there isn't even a comparison, and if your financial situation is difficult enough that a credit card isn't an option for you, by all means contact us! We're here to help the new year be one you can look forward to.