Interesting Point: Payday loans
Payday loans are high-cost, short-term loans that are advertised to provide money to see you over to the next payday.
The only requirement is that you have a job, Social Security, disability or some other means of regular compensation.
The loans are usually small, just $200 or $300. But interest rates are so high that borrowers who can't repay the debt find themselves owing two or three times that much within just a couple of months.
When you get a payday loan, you write the lender a check for the amount that you are borrowing plus interest, which is typically $15 to $25 for every $100 you receive.
If you're borrowing $100, for example, you'd make the check out for $115, the principal plus $15 in interest.
The loans must be repaid in one or two weeks, usually coming due on your next payday. At that time, you can:
- Payoff the loan by allowing the lender to cash your check.
- Give the lender $115 in cash and get your check back.
- Roll all of part of the loan over until your next payday.
If you roll the loan over, you would then owe $132, which is 15% added to the $115 you owe. If you roll it over again, you would owe $152 -- 15% added to $132.
If you roll it over three times, you would be paying a 391% annual percentage rate on the loan.
That's such an incredibly expensive way to borrow money it can quickly saddle you with more debt than you can afford to repay.