The east side of the small town I live in has become the shopping destination for the surrounding communities with new businesses opening on a regular basis. That is a good thing. But one of the newest businesses to open is an unfortunate sign of the times.
As I drive less than a mile from my home to Walmart or Staples or Applebees or to the multiplex cinema, I also pass Main Street Financial, The Cash Store and Title Max. These, of course, are payday loan stores that cater to desperate people in financial trouble. They all advertise instant cash with easy repayment no matter what your credit score. All you need is a job and a checking account.
Every year more than 12 million Americans take out loans from payday loan companies to meet everyday living expenses such as rent, car payments and utility bills. Here is Rachel’s real life story which should be shared with your students.
I have been living on my own for about two years, but have found it difficult to make ends meet each month on my income. Last year I was hit with some unusual expenses and just didn’t have the money to pay my rent and other bills. I had maxed out my credit card and didn’t want to ask my parents for the money since I am trying to be independent.
I decided to take out a payday loan for $400 which I planned to pay back when I got my next paycheck. I was charged $52 in interest and fees for the loan, but I was able to pay my rent.
But I wasn’t much better off when I got my next paycheck and couldn’t pay back the $400. What they let me do was pay another $52 in fees and carry over the loan. I kept doing this for over five months thinking each time I would be able to pay the debt with my next paycheck, but that never happened.
Finally, I got smart and asked my parents for the money. But by that time I had paid over $500 in interest and fees and still owed the $400.
The PEW Charitable Trust offers these facts about payday loans:
- 36 states offer payday loans.
- There are over $7 billion in payday loans given each year with the average loan being $375.
- The typical payday loan offers about two weeks of credit, due in full on the borrower’s next paycheck.
- The typical annual interest rate is about 400 percent.
- Only 1 in 7 borrowers can afford to repay the full amount of their loan by their next paycheck.
- Borrowers in states with no rate caps such as Idaho, South Dakota, Texas and Wisconsin pay the highest prices in the country, more than double those paid in states with interest rate limits such as Colorado, Maine, Minnesota and Oregon.
- States with the highest or no rate limits have the most payday loan stores per capita.
A goal of every financial literacy teacher should be to make certain their students understand how payday loans work and how to control their finances so they never get caught in the payday loan trap.
Try these projects:
- Have your students research the payday loan laws of your state.
- Have your students survey the number of payday loan stores in your community.
- Have your students interview a friend or relative who has taken out a payday loan.
Charles Wilkinson, Publisher