Section 8.3 High-Interest Loans
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Step 4: Determine the full loan payback amount. Add the loan amount to the
loan fee.
payback amount = loan amount + loan fee
payback amount = $150 + $33.57
payback amount = $183.57
Check It
Jennessa decided that she needed to get a payday loan for $225. The payday
lender charges 25% for a brokerage fee plus 0.4% in interest charges for a 14-day
term loan. How much will Jennessa pay back at the end of the 14 days?
Payday loans are made by institutions called payday lenders. Payday lenders
typically operate from storefront locations and often perform a variety of
services such as check cashing, money orders, and title loans.
Title Loans
Because automobiles are signifi cant assets, there is a special kind of
document, called a title, which legally establishes the owner of the automobile.
A title loan is a form of loan where a lender takes possession of the title of your
car as collateral until a short-term loan is repaid. Most title loans are for one
month or less. At the end of the term, the entire loan is due in one payment with
fees. If the borrower cannot repay the loan at the end of the term, the lender
may roll the loan over for another month and add more fees. The lender may also
choose to sell the car if the borrower cannot repay the loan.
Title loans, like payday loans, are typically high-interest loans. APR on a
title loan can be 300% or more. Some states have made it illegal to charge an
APR over 36% on a title loan. To determine the true cost of a title loan, use the
following formulas:
loan fee = loan amount × fee rate
payback amount = loan amount + loan fee
Example 8-3B
See It
Hasty Cash Xpress off ers title loans. They will lend up to 20% of the value of
a vehicle for a 30-day loan term. Hasty Cash Xpress charges a fee of 28% of the
loan amount. Pete has a car that is worth $4,300 and wants to get a title loan for
the maximum amount possible. Calculate Pete’s loan amount and the amount
that he will have to pay back in 30 days.
fyi
Money orders are
documents similar to
checks. However, they
are more trusted than
personal checks because
money orders are paid for
when issued.