Post on 22-Dec-2015
HOW EXPENSIVE ARE PAYDAY LOANS?
TERMINOLOGYFINANCE CHARGE: The dollar amount paid to borrow money.INTEREST: The cost of borrowing money expressed as a percentage of the loan amount.FEES: The additional costs beyond the interest associated with borrowing money.ROLLOVER: Paying a fee to delay paying back the loanUNDERBANKED: Consumers have either a checking or savings account, but also rely on alternative financial services.
TERMINOLOGYAlternative Financial Services (AFS) include: Check-cashing outlets Money Transmitters Car-title Lenders Payday Loan Stores Pawn Shops Rent-to-Own Stores
Source: FDIC
TERMINOLOGYANNUAL PERCENTAGE RATE (APR): The yearly rate that is charged for borrowing expressed as a single percentage number. This represents the actual yearly cost of funds over the term of a loan including any fees or additional costs associated with the transaction.
WHAT IS A PAYDAY LOAN?
A payday loan – which might also be
called a “cash advance” or “check loan” – is a short-
term loan, generally for $500 or less, that
is typically due on your next payday.
WHO USES PAYDAY LOANS?
THE UNDERBANKED AND AFS 81 percent use non-bank
money orders 30 percent use non-bank
check cashing services 16 percent use payday
lending 16 percent use pawn
shops 13 percent use rent-to-
own services 13 percent have used
refund anticipation loans during the past 5 years
Source: FDIC
PAYDAY AMERICA• Twelve million American adults use payday loans
annually• On average, a borrower takes out eight loans of
$375 each per year and spends $520 on interest. • Three-quarters of borrowers use storefront
lenders and almost one-quarter borrow online. • Most payday loan borrowers are white, female,
and are 25 to 44 years old.• 69 percent used it to cover a recurring expense,
such as utilities, credit card bills, rent or mortgage payments, or food.
PAY DAY LOANS GENERALLY
HAVE THREE FEATURES:• The loans are for small
amounts.• The loans typically
come due your next payday.
• You must give lenders access to your checking account or write a check for the full balance in advance that the lender has an option of depositing when the loan comes due.
HOW DO YOU CALCULATE APR?
• The loans on the left are for 14 days. Divide the fee by 14 to get the daily fee.
• Multiply that amount by 365 to get the annual fee.
• Divide that by the loan amount and multiply by 100 to convert it to a percentage.
TOTAL COST WITH ROLLOVERS
WEEKS TOTAL PAID
0 $575
2 $650
4 $725
6 $800
8 $875
10 $950
12 $1025
APR = 456.25%
TWO STOREFRONT PAYDAY LENDERS FOR EVERY ONE
STARBUCKSCracking Down on Payday Lenders
ALTERNATIVES TO PAYDAY LOANS
• Negotiate a payment plan with the creditor
• Charge the amount to your credit card
• Receive an advance from your employer
• Use your bank’s overdraft protections• Obtain a line of credit from an FDIC
approved lender• Borrow money from your savings
account• Ask a relative to lend you the money• Apply for a traditional small loan• Ask your creditor for more time to
pay a bill• Use a cash advance on your credit
card
TOTAL COST FORMULA
• T= Total Cost• F= Finance Charge• L= Loan Amount• R= Number of
Rollovers
T= L+F(1+R)
76% of Americans Living Paycheck to Paycheck