Brian Page, a teacher in Reading Ohio, wants his students to understand the drawbacks of check-cashing services, pawnshops, rent-to-own stores, payday loans, and other shadow banking services. As a result, he scheduled a field trip for his students to visit these sources of high-cost financial services in their community, which are used by many unbanked consumers.
At LoanMax, they observed people getting loans with their auto titles serving as collateral. One missed payment could lead to repossession of the vehicle. Next, at CheckSmart, students learned about payday lending and tax refund anticipation loans.
At CashAmerica people were making loan payments on money borrowed, which used jewelry, electronics, and sports memorabilia as collateral. Finally, the visit to the Rent-A-Center store demonstrated the exorbitant costs of furniture, appliances, and electronics when using a rent-to-own payment program.
For additional information on teaching about high-cost financial services, go to:
- Have students talk with someone who has used one of these high-cost financial services. Obtain information about their experiences.
- If appropriate, have students visit a high-cost financial service provider to obtain information about their services and fees.
- Have students create a video presentation with suggestions on how to avoid using costly sources of financial services.
- Why are an increasing number of people using high-cost financial services such as pawnshop loans, payday loans, and rent-to-own programs?
- What alternatives might used by consumers instead of these high-cost financial services?
- What actions might a person take to avoid these high-cost financial services?
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
- Why does the market for payday loans exist?
- What actions might be taken to avoid using payday loans?
- Recommend actions for people who are caught in the trap of payday loans.
- 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.