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
- 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.
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.
Melissa Hart
Focus on Personal Finance, 2024 Release 