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Defenders of the high interest rates point out that the high interest is necessary to cover those customers who do not pay. They also add that the interest rate, as an annual figure, is less than that of an overdraft fee charged by a bank if that were expressed as an annual figure. When comparing it that way, the payday loan might seem to offer an advantage. But that sort of comparison is rather like comparing apples and oranges. The fees charged by banks aren’t fees charged for convenience; they are penalties. The idea is that you shouldn’t bounce a check, and the fee is intended to discourage you from doing so in the future. Plus, few banks charge fees as high as $60. Most charge half of that. And furthermore, it is a rare customer that writes a bad check on purpose. Most people, in theory, do not write checks when they know they don’t have the money in the bank to cover them.
For those who can afford to do so, borrowing money against a credit card would be a wiser choice, as the interest rate is much lower; usually in the 20-30% range. And payback terms are much more flexible. No credit card company will require full payment, plus interest, in a mere two weeks’ time.
The cash advance companies are certainly correct when they point out that they offer loans to people who have few other alternatives. Many of their customers have little or no credit and borrowing from banks or credit unions is not an option for them. But comparing high-interest loans to penalties for writing checks against insufficient funds is hardly a good example of how high-interest lending is cost effective.
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