Payday Loans & Credit Cards CENTS

What is a Payday loan?  A Payday loan is a small loan, also known as a “cash advance.” These loans typically become due in 14 days - your next payday.  When taking out a payday loan, lenders require a check for the full balance of the loan (including interest and fees) that may be cashed when the loan is due.  Each state places different regulations and limits on Payday lenders.  *Washington state regulations  Federal law also requires lenders disclose finance charges and APR in writing

Payday Loan: Regulations & Limitations  Washington State:  Payday loan limit: $700 or 30% of your gross monthly income, whichever is less  8 payday loans in a 12-month period  Installment plans are available if you cannot repay the balance, but you must notify the lender before the loan becomes due.  Lenders may not harass or intimidate in order to collect the loan  Max loan term: 45 days  Max fee: 15% for first $500 and 10% for amounts above $500  Payday lenders (store and internet) must be licensed by Washington’s DFI. Verify a payday lender’s license with the DFI before doing business with a payday lender.  RING-DFI 

Payday Loan: Regulations & Limitations continued  Federal:  Truth in Lending Act (TILA)  Lenders must disclose to consumers in writing:  Any finance charges  Annual Percentage Rate (APR)

Payday Loans & Credit Cards: Key Terms and Definitions  Principal:  Original amount borrowed or the value of the loan excluding any associated interest and fees  Interest Rate:  Percentage of the principal charged by a lender to borrow money.  Simple (basic) Interest:  The interest accrued on the original principal only.  Calculated: principal x interest rate x # of periods  Average Daily Balance (ADB): *used by most credit cards  Calculation to determine the interest rate on the loan balance  Taking the sum of your account balance each day, divided by # of days in the billing cycle.

Payday Loans & Credit Cards: Key Terms and Definitions cont.  Annual Percentage Rate (APR): interest rate calculated on a annual basis – the yearly cost of the loan.  Credit Card Example: a credit card has an APR of 14%, the monthly interest rate would actually be 1.167% (14% ÷ 12 months = 1.167%)  Payday loan example:  Loan amount: $500  Fee: 15% on $500 = $75  Loan term: 14 days  APR on 14 day loan: 391%  How is this calculated?  15% interest (fee) is divided by 14 days = % interest per day  % interest per day x 365 days in a year = 391% APR (annual interest rate per year)  Payday loan Renewals (rollovers): extending the date the payday loan is due for an additional fee. *Washington state does not allow payday loan rollovers.  Example of costs of a rollover: ($200 loan + 1 st term interest + rollover fee) x interest on rollover period

Payday Loans & Credit Cards: Key Terms and Definitions cont.  Compound Interest: the interest earned on the previous term’s principal plus interest.  Example: $100 loan with an annual compound interest rate of 10%. After 2 years what would your interest be?  1 st year: $100 x 10% = $10 interest  2 nd year: $110 (loan + 1 st year interest) x 10% = $11  Total owed: $121 ($100+$10+$11)

Compound Interest: How does it work?  Credit cards are a prime example of where you will see compound interest at work. Why?  Because the interest charges on the balance for the current billing cycle likely includes interest from the previous billing cycle – the interest is compounding!  Using an Average Daily Balance calculation  Example:  $300 balance (purchases plus interest from previous billing cycle)  18% APR  31 day billing cycle  ADB Calculation: $300 x.18 x 31/365 = $4.59 interest  New balance owed: $304.59

Late Fees & Penalties  Credit card companies love late fees and penalties.  One of the harshest penalties for late payments is seeing a dramatic increase in the APR on your credit card and it will also usually include a fee for the late payment.  Example: if you have a credit card with a 15% APR and you miss a payment, the credit card company could apply a penalty and change your APR to a much higher rate, such as 24%  Late fees are typically $35 per occurrence

High Cost of Minimum Payments:  Minimum payments will increase both the number of payments and total interest owed.  Making minimum payments are not effective in reducing your debt.  Holding large amounts of debt over time can affect your credit score.  Take a good look at your credit card statement!  Minimum Payment Warning:  Shows how costly minimum payments can be over time

High Cost of Minimum Payments: Example  Credit Card Example: Minimum v. larger payment  Credit Card Balance: $14,700  APR: 15.24%  Minimum Payment: $318 would take  24 years to pay off  You will pay $$32,274  More than Minimum: $512  3 years to pay off  You will pay $18,430

Common Mistakes: Credit Cards  Having too many credit cards  Failing to read the fine print:  Interest rates and when they can change  Fees and penalties  Being lured in by low introductory rates and not noticing the change  Cash Advances: come with fees and significantly interest rates  Making only minimum payments  Late payments  Not checking your monthly statements:  Limits, APR changes, incorrect/fraudulent charges, balance  Making unnecessary charges:  Impulse purchases and small purchases that could have been paid for in cash

Common Mistakes: Payday loans  Borrowing more than you need or can afford to pay back  Borrowing from more than one lender  Failing to repay the loan on time  Not seeking out alternative ways to borrow money  Friends, family, etc.

Best Practices  Establish a savings account or emergency fund  Monitor your statements  Shop around  Work with credit card companies to reduce interest rates  Transfer balances from high rate cards to lower rate cards  Make more than the minimum payment  Make a budget  Only charge what you can pay off each month

Questions?