How Expensive are Payday Loans?

In this personal finance lesson, students will learn how a payday loan works.

• Paper – blank sheets – one per group of 2-3 students
• Activity 1, one copy per student
• Activity 2, one copy per student
  Activity 2 Key, answer guide
• Activity 3, one copy per student
• FTC Payday loan video available at https://www.youtube.com/watch?v=WtruZLAiJkc Payday loan video (same video) also available here https://www.ftc.gov/media/70849
• Interactive graphing tool available at https://nces.ed.gov/nceskids/createagraph/
• Payday loan public service information available at https://consumer.ftc.gov/consumer-alerts/2020/04/what-you-should-know-about-payday-loans-and-car-title-loans
• CFPB payday loan information video https://www.youtube.com/watch?v=XUqyyJSoM_s&t=20s
• More information and FAQ’s on payday loans https://www.consumerfinance.gov/compliance/compliance-resources/consumer-lending-resources/payday-lending-rule/payday-lending-rule-faqs/

Multiple Choice

1. Which of the following is a characteristic of a payday loan?
   1. Loans are typically for amounts ranging from $500-$1,000
   2. Loans can be paid off in part or in full at any time
   3. [You need a checking account in order to get one]
   4. They are only used by people with bad credit
2. Rasheem goes to a payday lender and borrows $450. He is told the finance charge will be $50 for two weeks. What is the total cost of his loan if it takes him six weeks to pay it off?
   1. $625
   2. [$650]
   3. $800
   4. $1,850

Constructed Response

Mary Ellen is comparing offers for payday loans from two different companies. She needs to borrow $600. While she knows both payday lenders loan money for two weeks at a time, she doesn’t feel that she will have the money to pay it off in just two weeks. She will pick up extra hours at work to save the money and hopes to pay it off in eight weeks. What would the total cost be at each lender? How much more expensive is the most expensive offer? Show your work.

Fast Cash advertises a finance charge of $90 for a $600 loan. Cash Now advertises a finance charge of $18 for every $100 you borrow.

[For each lender, the number of rollovers or R would be (8/2) or 4.]

Fast Cash:

Total cost = Loan amount + Finance charge (1 + Number of Rollovers)

                                        T = L + F(1+R)

t = 600 + 90(1+4)

t = 600 + 90(5)

t = 600 + 450

t = $1,050

Cash Now:

Before using the formula, the finance charge also needs to be determined. Since she would borrow $600, the rate of $18 for every $100 borrowed needs to be calculated as (600/100)x18 = 6 x 18 = 108.

Total cost = Loan amount + Finance charge (1 + Number of Rollovers)

                                        T = L + F(1+R)

t = 600 + 108(1+4)

t = 600 + 108(5)

t = 600 + 540

t = $1,140

Using Fast Cash would cost Mary Ellen $1,050 while using Cash Now would cost her $1,140. Cash Now would be $90 more expensive.