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WalletPrep worksheet · Debt

How do payday loans work?

Name ____________________ Date __________

Key ideas

  1. A $15 fee per $100 is about 391% APR. On a two-week loan, $15 ÷ $100 × 365 ÷ 14 ≈ 391%. Credit cards run roughly 12% to 30%.
  2. Rollovers charge the fee again and again. Each rollover costs a new fee but doesn't lower what you owe. Four rollovers on $400 add $240.
  3. Credit union PALs cap the APR at 28%. Federal credit union payday alternative loans run $200 to $1,000 for 1 to 6 months, with a $20 maximum fee.

Vocabulary

Payday loan
A small, short-term, high-cost loan, often $500 or less, that is due in one payment on your next payday along with a fee.
APR
Annual percentage rate: the yearly cost of borrowing money, shown as a percentage. It is the number to compare on cards and loans.
Credit union
A not-for-profit financial cooperative owned by its members, offering checking, savings and loans much like a bank.
Rollover
Moving money from one retirement account to another, such as an old 401(k) to an IRA, without paying tax on it.
Payday alternative loan
A small loan from a federal credit union, designed as a cheaper option than a payday loan, with a maximum APR of 28%.
Emergency fund
Cash set aside only for surprises like a job loss, a car repair or a medical bill. A common goal is 3 to 6 months of essential costs.

Work it out

Sam needs $400 to cover rent until payday. A payday lender charges $15 per $100 for two weeks. His credit union offers a 3-month PAL at 28% APR with a $20 fee.

  1. Payday loan
  2. First fee ($15 per $100)
  3. Rollover 1 fee
  4. Rollover 2 fee
  5. Rollover 3 fee
  6. Rollover 4 fee
  7. Fees after 10 weeks
  8. PAL interest, 3 months
  9. PAL application fee
  10. Total cost of the PAL

Check yourself

  1. A payday lender charges $20 per $100 for two weeks. What is the fee on a $300 loan?

    • A. $20
    • B. $40
    • C. $60
    • D. $300

  2. What happens when you roll over a payday loan?

    • A. Your balance is cut in half
    • B. You pay a new fee and still owe the full amount
    • C. The lender forgives the fee
    • D. Your credit score goes up

  3. What is the maximum APR on a federal credit union payday alternative loan?

    • A. 28%
    • B. 36%
    • C. 391%

Your turn

If you're short this pay period, call the company you owe and ask for a payment plan or a few extra days. Then call your credit union, or look one up, and ask whether it offers payday alternative loans.

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Answer key

How do payday loans work?

Work it out

  1. Payday loan$400
  2. First fee ($15 per $100)$60
  3. Rollover 1 fee$60
  4. Rollover 2 fee$60
  5. Rollover 3 fee$60
  6. Rollover 4 fee$60
  7. Fees after 10 weeks= $300
  8. PAL interest, 3 months$18.81
  9. PAL application fee$20
  10. Total cost of the PAL= $38.81
  1. The payday fee is $400 ÷ $100 × $15 = $60 for two weeks. As an APR, that is $60 ÷ $400 × 365 ÷ 14 ≈ 391%.
  2. Sam can't repay in two weeks and rolls over four times. That is 5 × $60 = $300 in fees, and he still owes the $400.
  3. The PAL costs three payments of $139.60, about $18.81 in interest, plus the $20 fee: $38.81 in all, with the $400 fully repaid.

Check yourself

  1. C. $60 $300 ÷ $100 = 3, and 3 × $20 = $60, due with the $300 in two weeks.
  2. B. You pay a new fee and still owe the full amount A rollover pushes the due date out in exchange for another fee. None of that fee lowers what you borrowed.
  3. A. 28% PALs from federal credit unions are capped at 28% APR, with an application fee of no more than $20.