Payday Loans and Why to Avoid Them

As you learned in Chapter 7 of Personal Finance, Turning Money into Wealth, you should be wary of “payday loans.” Recently, banks have moved into this market with “bank deposit advance loans” which look an awful like payday loans – lasting, in general, for about two weeks with loan amounts up to about $500.  Both bank deposit advance loans Loans-borrow-repayand payday loans are aimed at people with jobs and checking accounts, but who need some money (usually $100 to $500) to tide them over for 1 or 2 weeks, or until their next “payday.” Lately, these loans have even surfaced on college campuses where students may not even have a job or a paycheck, just an allowance from home.

To say the least, the fees on these loans are quite high, costing from $10 to $15 to borrow $100 for only two weeks.  Recently Pew Charitable Trusts came out with a report on them, “How Borrowers Choose and Repay Payday Loans.”  The findings were startling.  They found that over half of the borrowers were not borrowing for temporary emergencies, but rather dealing with persistent shortfalls, and that only 14 percent of borrowers can afford enough out of their monthly budgets to repay an average payday loan.

Discussion questions:

1.  Read through the Overview and Key Findings of “How Borrowers Choose and Repay Payday Loans” – what do you think of payday loans?  Do you think they should be regulated in some way?  Why or why not?

2.  Principle 1: The Best Protection Is Knowledge – will hopefully give you the edge in your personal financial life.  You will know to question, even the bank’s information if it seems too good to be true.  What advice would you give to a friend who told you she was going to her bank to get a “deposit advance loan”?

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