Payday Loans

Loans with annual interest rates exceeding 400 percent continue to occur in our society.  Payday loans are often used to bridge a cash-flow shortage between paychecks. Also known as “cash advances” or “check loans,” they are usually expensive, small-dollar loans, of generally $500 or less. They offer quick and easy access to funds for consumers who may not qualify for other credit.

A recent Consumer Financial Protection Bureau (CFPB) study revealed that four out of five payday loans are rolled over or renewed within 14 days. The majority of payday-loan borrowers renew their loans so many times that they end up paying more in fees than the amount of money they originally borrowed.  This study also reported that:

  • only 15 percent of borrowers repay all of their payday debts when due without borrowing again within 14 days.
  • 20 percent default on a loan at some point, and
  • 64 percent renew at least one loan one or more times.

These actions often create exorbitant fees and charges, and keep the consumer in perpetual debt.

For additional information and a complete copy of the payday loan report go to http://files.consumerfinance.gov/f/201403_cfpb_report_payday-lending.pdf

Discussion Questions

  1. Why does the market for payday loans exist?
  2. What actions might be taken to avoid using payday loans?
  3. Recommend actions for people who are caught in the trap of payday loans.

 

Teaching Suggestions

  • Have students visit a payday loan office or an online payday loan provider to gain additional insight into this high-cost financial service.
  • Have students make a short presentation with a summary of actions that might be taken to avoid payday loans.

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