HOW EXPENSIVE ARE PAYDAY LOANS?
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HOW EXPENSIVE ARE PAYDAY LOANS?Slide2
FINANCE 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.Slide3
Alternative Financial Services (AFS) include:Check-cashing outletsMoney TransmittersCar-title LendersPayday Loan StoresPawn ShopsRent-to-Own Stores
ANNUAL 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.Slide5
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.Slide6
WHO USES PAYDAY LOANS?Slide7
THE UNDERBANKED AND AFS
81 percent use non-bank money orders30 percent use non-bank check cashing services16 percent use payday lending16 percent use pawn shops13 percent use rent-to-own services 13 percent have used refund anticipation loans during the past 5 years
Twelve million American adults use payday loans annuallyOn 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.Slide9
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.Slide10
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.Slide11
The True Cost of a Payday LoanSlide12
TOTAL COST WITH ROLLOVERS
APR = 456.25%Slide13
TWO STOREFRONT PAYDAY LENDERS FOR EVERY ONE STARBUCKS
Cracking Down on Payday LendersSlide14
ALTERNATIVES TO PAYDAY LOANS
Negotiate a payment plan with the creditorCharge the amount to your credit cardReceive an advance from your employerUse your bank’s overdraft protectionsObtain a line of credit from an FDIC approved lenderBorrow money from your savings accountAsk a relative to lend you the moneyApply for a traditional small loanAsk your creditor for more time to pay a billUse a cash advance on your credit cardSlide15
TOTAL COST FORMULA
T= Total Cost
F= Finance ChargeL= Loan AmountR= Number of RolloversT= L+F(1+R)
76% of Americans Living Paycheck to PaycheckSlide16Slide17Slide18Slide19Slide20Slide21