Placing rate caps on loan companies rewards few

There are some fairly typical restrictions passed on the loan industry. One of one of the most usual is rate caps on rates of interest. It may seem like it is a good thing to do to protect consumers from unfair rates of interest. However, the typical used to judge the rate of interest does not get brought up. Almost half of all cash advance loan companies are small company owners, and their margins are being constrained.

Math on the rate cap for cash advances needs redoing

States have began introducing many rate of interest caps on loans. Usually about a 36 percent APR on cash advances is where the cap lies. There are some difficulties with a 36 percent cap even though it may seem logical. First, one can hardly assess the fees on a cash advance or payday cash loan as APR. Annualized Percentage Rates should hardly apply to a loan that matures in two weeks or less. Let's say a loan lender lends $100. Say the charge is $20. If that $20 fee were compounding once a month, the APR is 240 percent. If it is assumed to compound each two weeks, that $20 fee is 480 percent annual interest. Simple interest can be used at the ration of total amount paid vs. total amount borrowed. That means it is only 20 percent interest for the $100 to have a $20 fee.

Wondering Cui Bono

The phrase “cui bono”, in Latin, basically means “Who Benefits?”. Short term loan rate caps benefit only a couple of institutions. These are credit unions and banks of course. Credit cards look a lot more attractive than pay day loans when APR is the standard. Payday advance looks much better though when considering the total amount a person pays back in simple interest vs. a credit card.

More terrible price ceilings

Price ceilings are what rate caps can be compared to. The business is told it can only charge a certain amount for its product. This means that the margin for profit is drastically reduced, and also the consumer can’t benefit from price competition. Owners of 50 percent of payday cash advance loan stores are small. They’re small business owners rather than giants. The economy sucks. It shouldn't be punishing these people. Want to know more? Check out the Payday cash advance loan Facts and Statistics Report on Personal Money Store.