1. Payday Loans And Other Lending Traps
Personal Finance

2. Can’t Wait Until Payday?
You need $300! How are you going to get it?
There are many ways to obtain cash if a person needs money before payday

3. Ways to get a Loan Credit card Payday loan Auto title loan Pawn shops
Loan from your financial institution
Loan from parents or other family/friends

4. What Are Some Other (Legal)Ways To Get Money?

5. Short term loan providing immediate cash. Also known as:
PayDay Loans
Short term loan providing immediate cash. Also known as:
Cash advance loans
Check advance loans
Post-dated check loans
Deferred deposit check loans

6. Payday lending locations
Check cashers
Payday loan stores
Pawn shops
Toll-free numbers
Rent-to-own companies
Internet
Required to give the lender access to financial accounts and social security number
Increases the risk of fraud and identity theft

7. How to receive a payday loan
Who uses payday loans?
Users typically have poor credit history
Users cannot obtain a traditional loan
Requirements to receive a payday loan
Have a bank account
Proof of income
Personal identification

8. Why Use Check Cashers?
Focus groups of low-income and ethnic consumers identified five ways check cashers were superior to banks
Easier access to immediate cash
More accessible locations
Better service
Shorter lines, more tellers, more targeted product mix in a single location, convenient operating hours, and Spanish-speaking tellers
More respectful, courteous treatment of customers
Greater trustworthiness

9. Obtaining a payday loan
Personal check
Individual writes a check to the lender for the amount borrowed and the lending company fee
Payday loans are issued for amounts between $50 and $1000
Payday loan fees are between $10 and $30 per $100 borrowed
Fees translate to an APR of 391% - 443%!!

10. Example of a Payday Loan
Example: If James needs $100, he will be charged $15 in fees. He will write a check for $115 and receive $100.
Lender will hold the check until the agreed upon date (usually the borrower’s payday) before cashing it

11. Obtaining a payday loan
Automatic withdrawal
Borrower gives lender permission to automatically withdraw the funds from their financial institution account on the date of the check

12. Payday Lending Options
Payday loans are difficult to pay back
Payday lending companies may require borrowers to pay back the entire loan in one lump sum rather than installments
For example: if Max saves $25 each pay period, he cannot apply that money to a payday loan until it equals the total cost of the loan

13. Other credit options, such as a credit card or loans do allow installment payments
For example: if Max saves $25 each pay period, he can apply that money to a credit card balance
91% of all payday loans are made to borrowers with five or more payday loans per year (Center for Responsible Lending, 2004)

14. Payday Lending Options
If lenders cannot pay back their payday loan in full on their pay day, there are three options (on the next slides)

15. Option 1-Rollover or Extension
Pay another fee for the original loan
Example: If James does not have enough money to pay back his $100 loan, he may pay $15 to extend the loan until his next payday
Cost of the loan after one payday
Original loan = $100 + $15 = $115
Rollover fees = $15
Total cost of the payday loan = $130

16. Option 2-Back to Back
Pay back the original loan, but immediately take out a new loan to cover expenses
Example: If James can pay back the original loan on his payday, but then needs money to pay other bills, he can take out another loan.
Cost of the loan after one payday
Original loan = $100 + $15 = $115
Payback $100 on payday
New loan = $100 + $15 = $115
Total cost of the both payday loans = $130

17. Option 3-Default
If an individual does not have enough money in his checking account, the borrower will default on the loan
Insufficient funds (NSF) fees are charged by the lender and financial institution
NSF fees may be charged multiple times if insufficient funds remain in the account

18. Example of a Default
Example: James wrote a check for a payday loan. He does not have enough money in his checking account to cover the loan amount on payday.
Cost of the loan after one payday
Original loan = $100 + $15 = $115
Payday lender NSF fees = $20
Financial institution NSF fees = $20
Total cost of the payday loan = $155

19. Risks of payday lending
Borrowers can get “trapped” in a cycle of borrowing
Lead to long term debt and legal problems
Payday loan customers are 4 times more likely than all adults to file for bankruptcy (Stegman & Faris, 2003)

20. Trends in payday lending
Ten years ago
Payday lending was virtually non-existent (Center for Responsible Lending, 2004)
By the end of 2005
Payday loans amounted to $40 billion (Consumer Federation of America)
Fees paid by borrowers were $6 billion (Consumer Federation of America)

21. The PayDay Loan Industry
Payday loan industry today:
Is thriving because people pay the fees without seeking alternative forms of credit
Today there are more payday loan stores than McDonalds and Burger King restaurants in California

22. Government Regulation
Some states have small loan laws making payday lending illegal or regulating the number of times a rollover can occur
The Truth in Lending Act
Requires payday loan companies to advertise the finance charges and annual percentage rate
All terms must be in writing for customers

23. Interest rates are usually about 25% a month (300% APR)
Auto Title Loans
Your car title is the security for a short-term loan (usually less than 30 days)
If you don’t pay the loan back, they can take your car
Interest rates are usually about 25% a month (300% APR)
The loan will be rolled over at the end of the month, if you pay the interest
More interest is added each month

24. Item—Microwave with a cash purchase price of $399
Sample of Rent-to-Own
Item—Microwave with a cash purchase price of $399
Rent-to-own will charge you $7.99 a week for 78 weeks (18 months)
Total price paid for microwave:
$623
Interest=$284
APR=about 40%

25. Pawn Shops You receive a loan on something you own (collateral)
If you don’t repay the loan, the pawnbroker can sell the item
You can extend the loan from month to month by paying the monthly interest fees
Usually you don’t get very much for your item
APR can be as high as 300%

26. Alternatives to Lending “Traps”
Family or friends
May charge much lower finance fees
Paycheck advance
Ask employers to issue a paycheck earlier if bills are due
Overdraft protection
May be less costly than paying payday lending fees

27. Ask creditors for more time to pay bills
Other Alternatives
Ask creditors for more time to pay bills
Make arrangements to pay bills after receiving a paycheck
Financial institution loan for large amounts
Interest rates may range from 10% to 18%
Credit card
Higher interest rate of 16% to 21%
Is still lower than the ~400% interest rate of a pay day loan

28. Create a spending plan Open a savings account Other Alternatives
Track income and expenses
Open a savings account
Set aside money from each paycheck
Emergencies
Unexpected expenses

29. Quotes of the Day
If you learn to spend less than you earn, then you will have the freedom and the money to reach your dreams in life
Those who understand interest EARN it. Those who don’t understand interest PAY it.

30. Interest buys you nothing
Remember...
If you buy something on sale with credit and cannot pay it off that month, it was not on sale
Interest buys you nothing