By John Campbell
Are you aware how much a cash advance may cost you if you need to rollover your loan? If you don’t pay attention to the terms and conditions associated with a particular cash advance offer you may be agreeing to pay back a lot more money than you’ll be comfortable spending.
You’ll want to know what you’re agreeing to before signing the bottom line on any cash advance. Fail to do so and you could be making a very costly mistake.
The first thing you’ll want to know is the term of the loan. A typical cash advance may be due in full anytime between one week and one month. A large number of advances from most lenders will have a payment term of two weeks.
The next thing you’ll want to know is the annual percentage rate (APR), which could be anywhere from 300 - 900 percent. At $15 per $100 borrowed you’ll be looking at an APR of 391 percent on a 2 week cash advance term. There are a number of things you’ll want to consider about the costs of rolling over a loan at this APR.
For example, let’s say you borrow $1,000 at the 391 percent APR mentioned above. By the end of the first loan term you’ll owe $1,150. If you can’t afford to pay back the $1,000 principal as well as the $150 interest charge you may have to pay the $150 in interest alone to rollover the loan. Now you’ll owe $1,150 all over again at the end of the next term.
Some lenders will require you to pay down a small portion of the principal with each rollover payment. On the example above, let’s say you have to pay an extra $50 on the principle in addition to the $150 you’re already paying in interest. If you rollover the loan until it’s completely paid off it will take you 10 months to pay off the loan and you’ll ultimately spend $4,000! Many lenders place a cap on the number of rollovers that are allowed before the entire balance is due in full so you may be forced to pay back the loan before you can afford to.
Paying off the loan before the end of the first term would be your most cost effective payment solution. If your lender allows you to prepay the full balance before it’s due you can save some money on your final finance charge. Otherwise, when the due date rolls around your bank account will either be debited an interest payment to rollover the loan or the entire loan balance will be debited. It’s up to you to find out if your loan will automatically be rolled over and request to have the balance paid in full before the due date if you can afford to pay it off. The exact opposite applies if your loan is scheduled to be paid off in full on the due date and you can’t afford to pay it off.
You’ll be responsible for paying any overdraft or other penalty fees if you don’t have enough money in your bank account to cover any charges when they’re due. If the lender can’t draw any money from your bank account on the due date you better arrange an alternate form of payment quickly or you could find your cash advance debt sent to a collection agency.
Only by carefully going over the full details of a cash advance before you sign for one will you know if the advance is good for your particular situation. The more uninformed you are, the closer you’ll be to a financial disaster just waiting to happen.
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John Campbell is the writer and editor of CashBuzz, A financial portal for the rest of us. Check out cashbuzz.com for the latest articles on money management and tips and tricks that can help improve your finances. This article may be reprinted on your Web site if the copyright, author information and active link are included.
