Debt Traps — slides
Financial Literacy Club
Credit & Debt · Lesson 6
Debt Traps
Payday loans, stacked buy-now-pay-later plans, and how debt spirals start.
10-minute lesson · learnwithflc.org
Debt Traps · 1 / 19
Financial Literacy Club
Credit & Debt · Lesson 6
Debt Traps
Payday loans, stacked buy-now-pay-later plans, and how debt spirals start.
10-minute lesson · learnwithflc.org
Today's goals
By the end of class, you'll be able to…
- Explain how payday loans and rollovers work
- Recognize the warning signs of predatory lending
- Identify safer options for a short-term cash need
Warm-up
A store offers to lend you $100 for two weeks for a $15 fee. Does that sound expensive? Guess the yearly rate.
Think, then write your answer.
The big idea
Debt Traps
Payday loans, stacked buy-now-pay-later plans, and how debt spirals start.
Credit & Debt · Lesson 6
Some kinds of borrowing are easy to get into and hard to get out of. They usually target people who need money fast.
Vocabulary
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%.
Credit & Debt · Lesson 6
- 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.
Credit & Debt · Lesson 6
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.
Credit & Debt · Lesson 6
Better options for a small emergency
An emergency fund. A payment plan with whoever you owe. A small-dollar loan from a credit union — federal credit unions' Payday Alternative Loans cap the APR at 28%. Or asking an employer about a pay advance.
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 |
Real 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.
Activity · small groups · 10 min
Follow the Rollover
- Scenario: Tyler borrows $400 from a payday lender. The fee is $15 per $100 every two weeks ($60).
- Tyler can't repay after two weeks, so he pays only the $60 fee and rolls the loan over. This happens four times.
- Groups draw a timeline showing each payment and what Tyler still owes.
- Groups list three safer choices Tyler had and rank them.
Check for understanding · 1 of 3
A lender charges a $15 fee for every $100 you borrow for two weeks.
Roughly what APR is that?
- AAbout 15%
- BAbout 30%
- CAbout 100%
- DAlmost 400%
D. Almost 400%
15% for two weeks, and there are 26 two-week periods in a year: 15% × 26 ≈ 390%.
Check for understanding · 2 of 3
Riley has four buy-now-pay-later plans running at once, each with payments every two weeks.
What's the biggest risk?
- AOverlapping payments are easy to lose track of and can cause overdrafts and late fees.
- BThere is no risk because each plan is small.
- CThe stores will cancel the purchases.
- DRiley's income will be reported publicly.
A. Overlapping payments are easy to lose track of and can cause overdrafts and late fees.
Each plan looks affordable alone. Together, automatic payments can hit the same week and drain a checking account.
Check for understanding · 3 of 3
A car title loan is low-risk because you get to keep driving the car.
- True
- False
False
If you fall behind, the lender can take the car. For many people, that also means losing the way they get to work.
Remember
Key takeaways
- 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.
Discuss
Talk it over
- Why do you think payday lenders are often located in lower-income neighborhoods?
- Should buy-now-pay-later plans be regulated like credit cards? Why or why not?
Exit ticket
Name one safer alternative to a payday loan.
Answer on your exit ticket before you leave.
Nice work today.
Review this lesson anytime — free, no account needed:
learnwithflc.org/courses/credit-and-debt/debt-traps
Next up: finish your worksheet.