Payday LendingPersonal Finance

© Family Economics & Financial Education – Revised November 2006 – Credit Unit – Payday LendingFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.4.4.G1Can’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– Loan

•From parents or family•From financial institution

© Family Economics & Financial Education – Revised November 2006 – Credit Unit – Payday LendingFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.4.4.G1Other Ways to get a Loan

– Credit card– Payday loan

•Short term loan providing immediate cash. Also known as:

–Cash advance loans–Check advance loans–Post-dated check loans–Deferred deposit check loans

– Other ways to borrow money???

© Family Economics & Financial Education – Revised November 2006 – Credit Unit – Payday LendingFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.4.4.G1Payday Lending•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

© Family Economics & Financial Education – Revised November 2006 – Credit Unit – Payday LendingFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.4.4.G1How 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

© Family Economics & Financial Education – Revised November 2006 – Credit Unit – Payday LendingFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.4.4.G1Why 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

© Family Economics & Financial Education – Revised November 2006 – Credit Unit – Payday LendingFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.4.4.G1Check Cashers vs. Payday Loans

•Payday lenders provide the same service-rich environments as check cashers, although may not be used as often because of high fees and continuing obligations

© Family Economics & Financial Education – Revised November 2006 – Credit Unit – Payday LendingFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.4.4.G1Obtaining 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%

© Family Economics & Financial Education – Revised November 2006 – Credit Unit – Payday LendingFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.4.4.G1Example 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

© Family Economics & Financial Education – Revised November 2006 – Credit Unit – Payday LendingFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.4.4.G1Obtaining 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

© Family Economics & Financial Education – Revised November 2006 – Credit Unit – Payday LendingFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.4.4.G1Payday Lending Options

•Payday loans are difficult to pay back

–Payday lending companies 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

© Family Economics & Financial Education – Revised November 2006 – Credit Unit – Payday LendingFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.4.4.G1

•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)

© Family Economics & Financial Education – Revised November 2006 – Credit Unit – Payday LendingFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.4.4.G1Payday Lending Options

•If lenders cannot pay back their payday loan in full on their pay day, there are three options (on the next slides)

© Family Economics & Financial Education – Revised November 2006 – Credit Unit – Payday LendingFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.4.4.G1Option 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

© Family Economics & Financial Education – Revised November 2006 – Credit Unit – Payday LendingFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.4.4.G1Comparing the Total CostFran purchases new clothes with $150 credit. She saves $50 each pay period to apply to the total credit cost.Example 1 – credit card with a 15% APR

•Total cost after 2 pay periods = $150 * .15 = $172.50Example 2 – payday loan with a $20 fee and a rollover fee of $30

•Total cost after 2 pay periods = $150 + $20 + $30 + $30 = $230

© Family Economics & Financial Education – Revised November 2006 – Credit Unit – Payday LendingFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.4.4.G1Calculating the Total Cost

Amount Paid after

Pay Period 1

Amount Paid after

Pay Period 2

Amount

Due:Credit Card

$ 50 $ 50 $72.50

Payday Loan

Saved $50, but can’t make installment payments, so she pays $30 to rollover the loan ($20 left from amount saved)

Saved $70 ($50 + $20), but can’t make installment payments, so she pays $30 to rollover the loan ($40 left from amount saved)

$230.00

© Family Economics & Financial Education – Revised November 2006 – Credit Unit – Payday LendingFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.4.4.G1Option 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

© Family Economics & Financial Education – Revised November 2006 – Credit Unit – Payday LendingFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.4.4.G1Option 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

© Family Economics & Financial Education – Revised November 2006 – Credit Unit – Payday LendingFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.4.4.G1Example 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

© Family Economics & Financial Education – Revised November 2006 – Credit Unit – Payday LendingFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.4.4.G1Risks 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)

© Family Economics & Financial Education – Revised November 2006 – Credit Unit – Payday LendingFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.4.4.G1Trends 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)

© Family Economics & Financial Education – Revised November 2006 – Credit Unit – Payday LendingFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.4.4.G1The 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

© Family Economics & Financial Education – Revised November 2006 – Credit Unit – Payday LendingFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.4.4.G1

Alternatives to payday lending•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

© Family Economics & Financial Education – Revised November 2006 – Credit Unit – Payday LendingFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.4.4.G1Other 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

© Family Economics & Financial Education – Revised November 2006 – Credit Unit – Payday LendingFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.4.4.G1

Other Alternatives•Create a spending plan

– Track income and expenses•Open a savings account

– Set aside money from each paycheck•Emergencies•Unexpected expenses

© Family Economics & Financial Education – Revised November 2006 – Credit Unit – Payday LendingFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.4.4.G1Government 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

© Family Economics & Financial Education – Revised November 2006 – Credit Unit – Payday LendingFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.4.4.G1Review

•Payday loans– Short term loan providing

immediate cash– Borrower pays a fee to obtain

cash– Can become very expensive if

the borrower cannot pay the loan back in full on their next payday

© Family Economics & Financial Education – Revised November 2006 – Credit Unit – Payday LendingFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.4.4.G1Review

•Payday lending options– Rollover– Back-to-back– Default

•Alternatives