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Section 8.3 High-Interest Loans
Objectives
• Describe how payday loans work.
• Explain how title loans work.
• Describe the nature of pawnshop loans.
• Identify resources for overcoming fi nancial diffi culties.
Terms
• payday loan
• title
• title loan
• pawnshop
• foreclosure
• bankrupt
• bankruptcy
Build Your Math Skills
Review these math skills to prepare for the lesson that follows.
1. Convert percentages to decimals by moving the decimal two places to
the left. Example: 15.8% → 0.158
A. 2.34% → B. 17.1% →
C. 10.4% → D. 0.95% →
2. Add decimals. Example: $15.80 + $3.90 = $19.70
A. $570.49 + $85 = B. $409.07 + $391.09 =
C. $1,178.06 + $940.98 = D. $507.57 + $346.82 =
3. Multiply decimals. Round to the nearest cent ($0.01) if necessary. Example:
$154 × 0.14 = $21.56
A. $112 × 0.06 = B. $340.50 × 0.09 =
C. $418.62 × 0.0045 = D. $350 × 1.25 =
Payday Loans
A payday loan is a short-term loan designed to be repaid when the
borrower gets his or her next paycheck. A payday loan is usually for an amount
ranging from fi fty to a few hundred
dollars. A typical use for a payday loan
is to pay a bill that is due before the
borrower’s next paycheck or to make
an emergency repair. With a payday
loan, the borrower writes a check to the
lender for the amount of the loan plus a
fee. The lender agrees to hold the check
until the borrower gets paid and gives
the borrower cash for the amount of the
loan.
The fees for payday loans are extremely high. Most payday loans are paid
back within a week or two. It is typical for the fee to be between $10 and $20
for each $100 borrowed. APRs on payday loans can be over 900%, depending
on how long the money is borrowed. Diff erent states have diff erent regulations
The fi nancially smart person knows that payday loans
are a very expensive way to borrow money. If you
think you need a payday loan, you should analyze
your budget. Make a plan to begin building some
savings that will help you avoid expensive emergency
fi nancing. Payday loans can become a trap because
part of your next paycheck is pledged to repay the
payday loan. This can also create continued fi nancial
stress. Avoiding payday loans is the fi nancially smart thing to do.
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