Responsible Borrowing

Nearly every media we stream bombards us with advertisements for online banking, cash advance loans, payday loans, and structured settlement buyouts. But are these products safe? What’s the catch?

Consider a typical payday loan that will offer you a $500 advance on your next paycheck. All you need to do is leave them a post-dated check that will draw on your next payday and pay a $75 fee for the service.  If you can’t pay the $500 back in two weeks, you just pay another $75 to keep the loan going until you can. Sounds easy, right?

The danger is that if you needed to take out a loan because you didn’t have $500 two weeks ago, chances are you aren’t going to have it this week either. You’ll find yourself in a bind, trying to raise $500 to pay back the loan, while having to pay $75 every two weeks until you can.

What is the annual interest rate on $75 out of $500 every two weeks? Use what you know about annual rates to work it out. For example, if you own $500 on a retail store credit card at 23%, each month you’ll pay 23%/12 in interest on the balance. So, if you don’t pay the card off on the first statement, the interest charge will be [latex](0.23/12)(500) = 9.58[/latex]. That’s only $4.79 every two weeks!

There are several different types of loans that have received a lot of advertising airplay recently. In this assignment, you’ll investigate three and report your findings.

The assignment

Listen for lending advertisements on the television and streaming media services for a few days. Record the types of lending advertisements you hear. Note which ones you seem to hear more frequently. Then, research 3 types of high interest, easily obtainable loans. These types of loans include payday loans, cash advance loans, some appliance and furniture rentals, some student loan consolidation banks, and some small personal loans. Include at least two that you noticed had high interest and “catchy” advertising. If you don’t tend to stream media, you can do a web search for payday loans, cash advance loans, and personal loans. Do research in the loan companie’ websites and by using consumer protection organizations.  Report the following for each.

• How many advertisements for this type of loan did you notice (or how high up on the web search did it appear consistently in the search results?)
• What is the APR for this loan? You may have to convert a short-term fee into APR using the hint in the introduction above.
• What are the terms if you cannot pay the loan back when it comes due? Or what is the APR after a late payment?
• If you couldn’t pay this loan back right away and needed to extend the time frame of the loan, how much would you end up paying in interest, and at what APR?

Then, in 2 or 3 paragraphs, discuss your findings by summarizing the pros and cons of short term, high interest loans. Include the nature of the advertising: frequency, charm, and tone. Possible beneficial uses of such a loan and possible harmful consequences. End with your recommendation for others regarding these products.