Stay Away From Here!

May 22, 2014 by

Study this image closely.

payday loans

Only the desperate, the foolish, and the ignorant enter this place. Oh, and employees.

This is a highly recognizable “payday lender“. It’s got all the telltale indicators: Windows covered by posters so embarrassed customers can avoid being recognized from outside; lots of repetition of the word “cash” and dollar signs (this company has even trademarked “cash money”—that’s actually the name of the place); lots of bold color and exclamation points. The branding screams: walk in broke, walk out feeling like a big shot with wads of currency in your pocket!

The Small Print

More challenging to detect is the cost of cash handed out at places like this. See the sign that boasts $300 LOAN FOR $20″? Here are the details, from the company’s website:

payday loan terms

The fine print.

Okay—remember these numbers:

Cost of borrowing = $6.67

for 14 days

for each $100 “advanced” (that means loaned)

Let’s Go to the Calculator!

What’s the APR (Annual Percentage Rate) on the advertised $300 loan?

365.25 days per year ÷ 14-day loan term = 26.1 loan periods per year

26.1 loan periods per year x $6.67 cost per loan period for each $100 borrowed = $522.26 cost per year

APR = $522.26 cost ÷ $300 loan principal = 174.1%

Cash Money calculates a 173.8% APR; the difference is probably rounding somewhere.

But Here’s What Really Happens

But the “low,” introductory APR the big window sign advertises, whether my 174.1% or Cash Money’s 173.8%, is only for new customers, and is good only on the first loan. That means the first 14 days the $300 is outstanding. See, for payday lenders, two weeks is a loan term. The large majority of payday lender customers do not repay their loan after the first 14-day loan term. Instead, they roll it over, and pay another fee. That’s how the cycle begins, and that’s why Cash Money® is offering an introductory special: to suck you in so that then the real gouging can commence!

After the first 14-day loan period the fee is $23 per $100 loaned. That’s $69 every two weeks for the privilege of borrowing $300. Cash Money® says this translates to an APR of 599.6%. Using the same method as above, I get an APR of 600.3%. Regardless of whose math is a bit flawed, the borrower is getting screwed!

The Moral of the Story

You know how tough it is to get ahead, save for retirement, and stay on top of your bills without borrowing money at 600%. Don’t make it tougher. STAY AWAY FROM PAYDAY LENDERS! And keep your friends and family away too!

Further related reading:

Reverse Bank Robbery

Installment Loan Money Trap

Wonga: So Wrong-a

Need Cash? Pawn Something

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