What Everybody Should Know About Payday Loans
The financial literacy of the Hungarian population is tragically deficient. (To what extent I wrote about it here, for example.) We learn all about whipweed, but we do not know anything about the most basic financial issues.
This is no different in the field of credit. I would like to change this a little with this writing.
(First, I wanted to write a summary of everything you need to know about payday loans, and then realized that this was too big for a post. So this post became an introduction to credit and interest, and in the next section I will write about what annuity and is it worth paying off the payday loan prematurely, is foreign currency payday loan and similar topics really currency.)
Money also comes with a price
Many people want or want to move into their own home so they don’t have to pay rent for their apartment. Rather, they take out a payday loan of their own, but forget about just one thing: as they pay the homeowner to use their apartment, they also pay the rent to the bank to use their money. This is called interest.
How much do you pay for using the money? I have asked this question to anyone who wants to borrow during my banking career, and no one has even come close.
Dear Reader, In your opinion, with the current 12% mortgage rate, how much interest do you pay the bank on a $ 10 million payday loan a month to use your money? (Your monthly repayment consists of the repayment of the principal and the interest payable on the principal. Now I ask only part of the interest.)
If you bet $ 20-25,000, you brought the average
The truth is that 12% of the 10 million HUF is 1.2 million HUF. This is what you pay annually as interest. Divided by 12 months, it turns out that you pay the bank $ 100,000 a month to use your money. (Once again, this is just the interest, it will never make you own the apartment. It also requires a capital repayment.)
Every third elementary school can calculate this, and no adult can. It’s a simple multiplication and then a division.
After that, does the monthly rent of $ 60,000 for a ten million apartment house seem expensive? Right? (The question is a bit more complicated, since real estate price increases and inflation also affect the final result. I wrote about it here with a calculator. But also read this.)
Of course, as your debt decreases slowly, the interest payable on it will decrease. However, with a 25-year, $ 10 million payday loan, after five years, you still have $ 9,565,320 in capital, meaning you still pay $ 95,600 in interest each month.
In five years, you paid $ 6,319,320 to the bank, of which only $ 434,680 reduced your debt and the cost of using the money was $ 5,884,640. That is, for the first five years you paid an average of $ 98,077 for using the money you paid to the bank. Once again: expensive for $ 10,000 for a $ 10 million sublease?
Bonus question: How much money will you repay on the above payday loan in 25 years? Apart from the capital repayment of 10 million HUF, a slight HUF 21.6 million goes to interest.
The same banks are not in your eyes when they give you an interest in your savings, but you should be upset if you dare to charge interest on your payday loan.
The bank does nothing but deposit money to depositors who need credit. He puts the deposit interest at 2-4% and passes it on. The difference is his benefit, so he works. If you do not want to pay interest to someone else’s money, then do not borrow, but save money monthly. I wrote an article about it here: How to Get Rid of payday loans
Another issue that may be important as an introduction is:
Who is responsible for the credit crunch that has occurred?
In my opinion, all three actors have the same responsibility. The state, which has made its mind-boggling public subsidies, guarantees and concessional payday loans, has borrowed the meager and insolvent masses. Those who didn’t even have a million forints to buy, so they bought 20-30 million new homes.
Banks that gave payday loans to the happy-unhappy because of the hunger for profit, almost indiscriminately.
And, yes, borrowers are just as responsible, many of them jumping into the illusion of their own home and going into debt for 20-30 years without even having a month’s saved money. These payday loans would have fallen even if there was no world crisis.
At the time, I was dealing with home payday loans when I dared to tell borrowers to have at least six months of livelihood in reserve, if they wanted to borrow it, everyone looked at me as if it was gone. Most of them did not even see so much money at one time, instead of self-sufficiency it was only socpol and the state guarantee.