Payday loans provide immediate cash but can become very expensive if not paid back in full by the next payday. Borrowers may take out additional loans to pay off previous ones, trapping them in a cycle of debt. Alternatives include asking for extensions from creditors, borrowing from family or using overdraft protection. Government regulations aim to increase transparency around payday loan fees and costs.

1. Payday Lending 1.4.4
Take Charge of Your Finances

2. 1.4.4.G1
© Family Economics & Financial Education – Revised November 2006 – Credit Unit – Payday Lending – Slide ‹#›
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
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. 1.4.4.G1
© Family Economics & Financial Education – Revised November 2006 – Credit Unit – Payday Lending – Slide ‹#›
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
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. 1.4.4.G1
© Family Economics & Financial Education – Revised November 2006 – Credit Unit – Payday Lending – Slide ‹#›
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
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. 1.4.4.G1
© Family Economics & Financial Education – Revised November 2006 – Credit Unit – Payday Lending – Slide ‹#›
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
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. 1.4.4.G1
© Family Economics & Financial Education – Revised November 2006 – Credit Unit – Payday Lending – Slide ‹#›
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
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

7. 1.4.4.G1
© Family Economics & Financial Education – Revised November 2006 – Credit Unit – Payday Lending – Slide ‹#›
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
Obtaining a payday loan
• Automatic withdrawal
– Borrower gives lender permission to
automatically withdraw the funds from their
financial institution account

8. 1.4.4.G1
© Family Economics & Financial Education – Revised November 2006 – Credit Unit – Payday Lending – Slide ‹#›
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
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. 1.4.4.G1
© Family Economics & Financial Education – Revised November 2006 – Credit Unit – Payday Lending – Slide ‹#›
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
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. 1.4.4.G1
© Family Economics & Financial Education – Revised November 2006 – Credit Unit – Payday Lending – Slide ‹#›
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
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. 1.4.4.G1
© Family Economics & Financial Education – Revised November 2006 – Credit Unit – Payday Lending – Slide ‹#›
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
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. 1.4.4.G1
© Family Economics & Financial Education – Revised November 2006 – Credit Unit – Payday Lending – Slide ‹#›
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
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
$230.00Saved $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
$72.50$ 50
Amount
Due:
Amount Paid after
Pay Period 2
$ 50Credit
Card
Amount Paid after
Pay Period 1

13. 1.4.4.G1
© Family Economics & Financial Education – Revised November 2006 – Credit Unit – Payday Lending – Slide ‹#›
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
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. 1.4.4.G1
© Family Economics & Financial Education – Revised November 2006 – Credit Unit – Payday Lending – Slide ‹#›
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
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. 1.4.4.G1
© Family Economics & Financial Education – Revised November 2006 – Credit Unit – Payday Lending – Slide ‹#›
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
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

16. 1.4.4.G1
© Family Economics & Financial Education – Revised November 2006 – Credit Unit – Payday Lending – Slide ‹#›
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
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. 1.4.4.G1
© Family Economics & Financial Education – Revised November 2006 – Credit Unit – Payday Lending – Slide ‹#›
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
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. 1.4.4.G1
© Family Economics & Financial Education – Revised November 2006 – Credit Unit – Payday Lending – Slide ‹#›
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
Review
• Payday loans
– 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. 1.4.4.G1
© Family Economics & Financial Education – Revised November 2006 – Credit Unit – Payday Lending – Slide ‹#›
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
Resources
1. “Consumers Warned of Online Payday Loans”
http://usgovinfo.about.com/od/consumerawareness/a/paydayloans.htm
2. “PayDay Loan Consumer Information”
http://www.paydayloaninfo.org/
3. “Payday Loans: Laws Protecting Montana Borrowers”
http://www.montana.edu/wwwpb/pubs/mt200102.html
4. “Quantifying the Economic Cost of Predatory Payday Lending”
http://www.responsiblelending.org/pdfs/CRLpaydaylendingstudy1218
03.pdf
5. “Payday Lending: A Business Model that Encourages Chronic
Borrowing”
http://www.kenan-
flagler.unc.edu/assets/documents/CC_Payday_lending.pdf

20. Questions?