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    Payday Loan Introduction

    How Payday Loan Providers Make Money

    Robert Finch
    Personal Finance Writer

    They make money by collecting interest on the funds they loaned out. Just like a bank or credit union.

    The amount they collect depends on the Annual Percentage Rate.

    Wait a minute you say, “When I borrow money from my payday loan provider, I pay back my payday loan in a 7 to 10 days.

    Why are telling me about Annual Percentage Rate? Doesn't that have to do with a loan for a whole year?

    I am addressing it, because that's one of the main numbers you should care about, when you do a payday loan.

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    Allow me to take a minute to explain how the APR applies to payday loans.

    Let's say this past Friday you borrowed $500. Now the following Friday, you have to pay the loan back.

    Some payday loan providers may allow you to do a payment plan. Check with them. But of course, this may increase the total amound of interest you have to pay back.

    In a futre article, I will address how you can lower your APR.

    Now, your payment of $500 plus interest is due in 7 days. The total amount due is $550. If you are quick with percentage you can see that you are paying back only 10 percent.

    (50/500) * 100=10%

    "That's far from the 300% some people claim, I will be charged when I do a pay day loan",you say.

    Well, as I said earlier, one of the important numbers is the Annual Percentage Rate.

    Payday loans live by this number.

    Remember, I said you paid back your loan in 7 days. The payday loan provider keeps the interest you paid back($50), , and the principal($500), they lend out again that same day to a different customer.

    Every week for a year, someone borrowed $500.00 and the next week that customer paid back $550.00.

    For 52 weeks this process took place.

    May be you borrowed once during the year from the payday loan provider,or may be you borrowed with greater frequency.

    What is important from a business prespective is that the funds be on loan again quickly.

    They do not want those $500.00 sitting in their safe doing nothing. They want those funds out in the world collecting interest.

    Forgive me, here is a little more math.

    52 weeks * $50.00=$2600.00

    The payday loan provider collected $2600.00 on $500.00.

    That amounts to 520% interest rate.

    I hear you saying, “that's just not true.”

    They lend it out $500.00 every week, so that should be:

    $500.00 * 52 weeks=$26000.00

    If we repeat the previous interest rate calculation, we get only 10%. “That's less than most credit cards,” you say.

    Remember, they are lending out the same $500.00 every week.

    Here is thel life cycle of a payday loan:someone borrows the funds one week, the funds are paid back the next week, and then the same funds are on loan again the following week.

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