Tuesday, June 22, 2010

Payday Lenders

I went on kind of a long drive last week (3200 mile round trip to Barkus, MN to pick up my Scamp!) On the way there I heard a story on the radio about payday lenders and check cashing shops. I've seen these places around and even remember using places like these myself when I was in my early twenties...I cant remember why I used a check cashing shop rather than a bank. I certainly wouldn't have used it had I taken a minute to compare the fees with what a real bank would have charged!

Here is a video from PBS Newshour that explains some of the ins and outs of payday lending:

I think it'd be a great exercise in financial literacy (and it could easily be expanded to include issues of social justice) to have my students go to a payday lender's website (for instance My Cash Now) and use the information provided by the lender to answer questions like these:

  • If a borrower took out a 14 day loan for $500 and then paid it back early after only 5 days, what would the APR be?

  • It's quite likely that a person who needs to borrow money 14 days before they are going to be paid will spend the money he borrowed and then need to use the new paycheck to pay back the loan, and so need to immediately take out another loan. If this happened for an entire year before the borrower was finally able to pay off the loan and not need another loan, how much will the borrower have paid in interest on that $500?

  • What if in the above situation, the person found they needed to take out a new loan to pay back the previous loan and its fees? So at the end of the first 14 days, they took out a loan of more than $500 because they needed the $500 plus the interest they had to pay. If they coninued in this fashion for an entire year, how much would the borrower pay in interest on that original $500?

  • Devise a fee structure that a payday lender might use if they decided that they really wanted to make exactly 1000% APR from their customers (victims?)

No comments:

Post a Comment