1. Take Charge of Your Finances
Payday Lending 1.4.4
Take Charge of Your Finances

2. Can’t Wait Until Payday?
There are many ways to obtain cash if a person needs money before payday
Loan
From parents or family
From financial institution
Credit card
Payday loan
Short term loan providing immediate cash
Cash advance loans
Check advance loans
Post-dated check loans
Deferred deposit check loans

3. Payday Lending Payday lending locations Check cashers
Payday loan stores
Pawn shops
Toll-free numbers
Rent-to-own companies
Internet
Required to give the lender access to financial accounts and social security number
Increases the risk of fraud and identity theft

4. How to receive a payday loan
Who uses payday loans?
Users typically have poor credit history
Users typically cannot obtain a traditional loan
Requirements to receive a payday loan
Have a bank account
Proof of income
Personal identification

5. Why Use Payday Loans?
Focus groups of low-income and ethnic consumers identified five ways check cashers were superior to banks
Easier access to immediate cash
More accessible locations
Better service
Shorter lines, more tellers, more targeted product mix in a single location, convenient operating hours, and Spanish-speaking tellers
More respectful, courteous treatment of customers
Greater trustworthiness
Payday lenders provide the same service-rich environments as check cashers, although may not be used as often because of high fees and on-going obligations

6. Obtaining a payday loan
Personal check
Individual writes a check to the lender for the amount borrowed and the lending company fee
Payday loans are issued for amounts between $50 and $1000
Payday loan fees are between $10 and $30 per $100 borrowed3
Fees translate to an APR of 391% - 443%4
Example: If James needs $100, he will be charged $15 in fees. He will write a check for $115 and receive $100.
Lender will hold the check until the agreed upon date (usually the borrower’s payday) before cashing it

7. Obtaining a payday loan
Automatic withdrawal
Borrower gives lender permission to automatically withdraw the funds from their financial institution account

8. Payday Lending Options
Payday loans are difficult to pay back
Payday lending companies require borrowers to pay back the entire loan in one lump sum rather than installments
For example: if Max saves $25 each pay period, he cannot apply that money to a payday loan until it equals the total cost of the loan
Other credit options, such as a credit card or loan do allow installment payments
For example: if Max saves $25 each pay period, he can apply that money to a credit card balance
91% of all payday loans are made to borrowers with five or more payday loans per year4

9. Payday Lending Options
If lenders cannot pay back their payday loan in full on pay day, there are three options
1. Rollovers or extensions
Pay another fee for the original loan
Example: If James does not have enough money to pay back his $100 loan, he may pay $15 to extend the loan until his next payday
Cost of the loan after one payday
Original loan = $100 + $15 = $115
Rollover fees = $15
Total cost of the payday loan = $130

10. Payday Lending Options
2. Back-to-back
Pay back the original loan, but immediately take out a new loan to cover expenses
Example: If James can pay back the original loan on his payday, but then needs money to pay other bills, he can take out another loan.
Cost of the loan after one payday
Original loan = $100 + $15 = $115
Payback $100 on payday
New loan = $100 + $15 = $115
Total cost of the both payday loans = $130

11. Payday Lending Options
3. Default
If an individual does not have enough money in his checking account, the borrower will default on the loan
Insufficient funds (NSF) fees are charged by the lender and financial institution
NSF fees may be charged multiple times if insufficient funds remain in the account
Example: James wrote a check for a payday loan. He does not have enough money in his checking account for the loan amount on payday.
Cost of the loan after one payday
Original loan = $100 + $15 = $115
Payday lender NSF fees = $20
Financial institution NSF fees = $20
Total cost of the payday loan = $155

12. Comparing the Total Cost
Fran purchases new clothes with $150 credit. She saves $50 each pay period to apply to the total credit cost.
Example 1 – credit card with a 15% APR
Total cost after 2 pay periods = $150 * .15 = $172.50
Example 2 – payday loan with a $20 fee and a rollover fee of $30
Total cost after 2 pay periods = $150 + $20 + $30 + $30 = $230
$72.50
$ 50
Amount Due:
Amount Paid after
Pay Period 2
Credit Card
Amount Paid after Pay Period 1
$230.00
Saved $70 ($50 + $20), but can’t make installment payments, so she pays $30 to rollover the loan ($40 left from amount saved)
Saved $50, but can’t make installment payments, so she pays $30 to rollover the loan ($20 left from amount saved)
Payday Loan

13. Risks of payday lending
Borrowers can get “trapped” in a cycle of borrowing
Lead to long term debt and legal problems
Payday loan customers are 4 times more likely than all adults to file for bankruptcy5

14. Trends in payday lending
Ten years ago
Payday lending was virtually non-existent4
By the end of 2005
Payday loans amounted to $40 billion2
Fees paid by borrowers were $6 billion2
Payday loan industry
Is thriving because people pay the fees without seeking alternative forms of credit
Today there are more payday loan stores than McDonalds and Burger King restaurants in California5

15. Alternatives to payday lending
Family or friends
May charge much lower finance fees
Paycheck advance
Ask employers to issue a paycheck earlier if bills are due
Overdraft protection
May be less costly than paying payday lending fees
Ask creditors for more time to pay bills
Make arrangements to pay bills after receiving a paycheck
Financial institution loan for large amounts
Interest rates may range from 10% to 18%3
Credit card
Higher interest rate of 16% to 21%3
Is still lower than the ~400% interest rate of a pay day loan

16. Alternatives to payday lending
Create a spending plan
Track income and expenses
Open a savings account
Set aside money from each paycheck
Emergencies
Unexpected expenses

17. Government Regulation
Some states have small loan laws making payday lending illegal or regulating the number of times a rollover can occur
The Truth in Lending Act
Requires payday loan companies to advertise the finance charges and annual percentage rate
All terms must be in writing for customers

18. Review Payday loans Payday lending options Alternatives
Short term loan providing immediate cash
Borrower pays a fee to obtain cash
Can become very expensive if the borrower cannot pay the loan back in full on their next payday
Payday lending options
Rollover
Back-to-back
Default
Alternatives

19. Resources 1. “Consumers Warned of Online Payday Loans”
2. “PayDay Loan Consumer Information”
“Payday Loans: Laws Protecting Montana Borrowers”
4. “Quantifying the Economic Cost of Predatory Payday Lending”
5. “Payday Lending: A Business Model that Encourages Chronic Borrowing”

20. Questions?