Module 6 of 7 10 min
Debt Traps
Payday loans, stacked buy-now-pay-later plans, and how debt spirals start.
Course lessons
Step 1
The lesson
Some kinds of borrowing are easy to get into and hard to get out of. They usually target people who need money fast.
Key term
Payday loan
A small, short-term loan due on your next payday, with a fee. According to the Consumer Financial Protection Bureau, a typical two-week payday loan fee of $15 per $100 borrowed works out to an APR of almost 400%.
- Rollovers: if you can't repay on payday, you pay another fee to push it back — and still owe the whole amount.
- Car title loans: you hand over your car's title as collateral. Miss payments and you can lose the car you need to get to work.
- Rent-to-own: small weekly payments that add up to far more than the item's price.
- Stacked buy-now-pay-later plans: each one looks small, but several at once are easy to lose track of. Missed payments can bring late fees and overdrafts.
Warning signs: "guaranteed approval," "no credit check," pressure to sign today, fees you pay before you get anything, or borrowing to pay off other debt.
Step 2
See it
An emergency fund costs nothing. A credit union small-dollar loan has a capped rate. A credit card cash advance charges a fee and immediate interest. A typical payday loan charges about $60 in fees for two weeks, which is almost 400% APR.
| Typical cost | Main risk | |
|---|---|---|
| Emergency fund | $0 | Remember to refill it |
| Credit union small-dollar loan | Federal credit union PALs: APR capped at 28% | Must be a member |
| Credit card cash advance | Fee + immediate interest, often at a higher APR | Balance can linger |
| Payday loan | About $60 for two weeks (≈ 400% APR) | Rollovers pile on fees |
Step 3
Real-world example
Tyler's $400 payday loan
Tyler borrows $400 from a payday lender for two weeks. The fee is $60 ($15 per $100). On payday, rent is due too, so he can't repay.
- He pays $60 to roll the loan over for two more weeks.
- Same problem next payday. Another $60. And again.
- After ten weeks, Tyler has paid $300 in fees — and still owes the original $400.
Nothing about Tyler's situation got better. The loan made it worse. A $400 emergency fund, or a credit union loan, would have broken the cycle before it started.
Step 4
Knowledge check
Answer each question, then check your answer to see the explanation. Retake it as many times as you like.
Question 1 of 3
Step 5
Summary
Payday loans, title loans, rent-to-own deals, and stacked buy-now-pay-later plans make borrowing fast and expensive. Rollovers and overlapping payments can trap people in fees. An emergency fund or a credit union loan is almost always a better path.
Step 6
What you should remember
- Payday loans often cost close to 400% APR.
- Rollovers add fees without shrinking what you owe.
- Title loans can cost you your car.
- Watch for "guaranteed approval" and pressure to sign today.
- Credit union small-dollar loans and emergency funds are safer.
Finished the lesson?
Mark it complete to track your progress.