Presentation on theme: "Payday Loans & Credit Cards CENTS. What is a Payday loan? A Payday loan is a small loan, also known as a “cash advance.” These loans typically become."— Presentation transcript:
What is a Payday loan? A Payday loan is a small loan, also known as a “cash advance.” These loans typically become due in 14 days - your next payday. When taking out a payday loan, lenders require a check for the full balance of the loan (including interest and fees) that may be cashed when the loan is due. Each state places different regulations and limits on Payday lenders. *Washington state regulations Federal law also requires lenders disclose finance charges and APR in writing
Payday Loan: Regulations & Limitations Washington State: Payday loan limit: $700 or 30% of your gross monthly income, whichever is less 8 payday loans in a 12-month period Installment plans are available if you cannot repay the balance, but you must notify the lender before the loan becomes due. Lenders may not harass or intimidate in order to collect the loan Max loan term: 45 days Max fee: 15% for first $500 and 10% for amounts above $500 Payday lenders (store and internet) must be licensed by Washington’s DFI. Verify a payday lender’s license with the DFI before doing business with a payday lender. 1-877-RING-DFI https://fortress.wa.gov/dfi/licenselu/dfi/licenseLU/LicenseLLU.aspx https://fortress.wa.gov/dfi/licenselu/dfi/licenseLU/LicenseLLU.aspx
Payday Loan: Regulations & Limitations continued Federal: Truth in Lending Act (TILA) Lenders must disclose to consumers in writing: Any finance charges Annual Percentage Rate (APR)
Payday Loans & Credit Cards: Key Terms and Definitions Principal: Original amount borrowed or the value of the loan excluding any associated interest and fees Interest Rate: Percentage of the principal charged by a lender to borrow money. Simple (basic) Interest: The interest accrued on the original principal only. Calculated: principal x interest rate x # of periods Average Daily Balance (ADB): *used by most credit cards Calculation to determine the interest rate on the loan balance Taking the sum of your account balance each day, divided by # of days in the billing cycle.
Payday Loans & Credit Cards: Key Terms and Definitions cont. Annual Percentage Rate (APR): interest rate calculated on a annual basis – the yearly cost of the loan. Credit Card Example: a credit card has an APR of 14%, the monthly interest rate would actually be 1.167% (14% ÷ 12 months = 1.167%) Payday loan example: Loan amount: $500 Fee: 15% on $500 = $75 Loan term: 14 days APR on 14 day loan: 391% How is this calculated? 15% interest (fee) is divided by 14 days = 1.0714% interest per day 1.0714% interest per day x 365 days in a year = 391% APR (annual interest rate per year) Payday loan Renewals (rollovers): extending the date the payday loan is due for an additional fee. *Washington state does not allow payday loan rollovers. Example of costs of a rollover: ($200 loan + 1 st term interest + rollover fee) x interest on rollover period
Payday Loans & Credit Cards: Key Terms and Definitions cont. Compound Interest: the interest earned on the previous term’s principal plus interest. Example: $100 loan with an annual compound interest rate of 10%. After 2 years what would your interest be? 1 st year: $100 x 10% = $10 interest 2 nd year: $110 (loan + 1 st year interest) x 10% = $11 Total owed: $121 ($100+$10+$11)
Compound Interest: How does it work? Credit cards are a prime example of where you will see compound interest at work. Why? Because the interest charges on the balance for the current billing cycle likely includes interest from the previous billing cycle – the interest is compounding! Using an Average Daily Balance calculation Example: $300 balance (purchases plus interest from previous billing cycle) 18% APR 31 day billing cycle ADB Calculation: $300 x.18 x 31/365 = $4.59 interest New balance owed: $304.59
Late Fees & Penalties Credit card companies love late fees and penalties. One of the harshest penalties for late payments is seeing a dramatic increase in the APR on your credit card and it will also usually include a fee for the late payment. Example: if you have a credit card with a 15% APR and you miss a payment, the credit card company could apply a penalty and change your APR to a much higher rate, such as 24% Late fees are typically $35 per occurrence
High Cost of Minimum Payments: Minimum payments will increase both the number of payments and total interest owed. Making minimum payments are not effective in reducing your debt. Holding large amounts of debt over time can affect your credit score. Take a good look at your credit card statement! Minimum Payment Warning: Shows how costly minimum payments can be over time
High Cost of Minimum Payments: Example Credit Card Example: Minimum v. larger payment Credit Card Balance: $14,700 APR: 15.24% Minimum Payment: $318 would take 24 years to pay off You will pay $$32,274 More than Minimum: $512 3 years to pay off You will pay $18,430
Common Mistakes: Credit Cards Having too many credit cards Failing to read the fine print: Interest rates and when they can change Fees and penalties Being lured in by low introductory rates and not noticing the change Cash Advances: come with fees and significantly interest rates Making only minimum payments Late payments Not checking your monthly statements: Limits, APR changes, incorrect/fraudulent charges, balance Making unnecessary charges: Impulse purchases and small purchases that could have been paid for in cash
Common Mistakes: Payday loans Borrowing more than you need or can afford to pay back Borrowing from more than one lender Failing to repay the loan on time Not seeking out alternative ways to borrow money Friends, family, etc.
Best Practices Establish a savings account or emergency fund Monitor your statements Shop around Work with credit card companies to reduce interest rates Transfer balances from high rate cards to lower rate cards Make more than the minimum payment Make a budget Only charge what you can pay off each month