Debt Traps

Part A. Vocabulary

Define each term in your own words.

Payday loan

Fill in each blank using the word bank.

Word bank: guaranteed · loans · shrinking · small-dollar · Title

Circle the best answer.

A lender charges a $15 fee for every $100 you borrow for two weeks.
1. Roughly what APR is that?
- A. About 15%
- B. About 30%
- C. About 100%
- D. Almost 400%
Riley has four buy-now-pay-later plans running at once, each with payments every two weeks.
2. What's the biggest risk?
- A. Overlapping payments are easy to lose track of and can cause overdrafts and late fees.
- B. There is no risk because each plan is small.
- C. The stores will cancel the purchases.
- D. Riley's income will be reported publicly.
3. A car title loan is low-risk because you get to keep driving the car.
True/False

Show your work.

1. A payday lender charges $15 per $100 borrowed for two weeks. What's the fee on $300, and about what APR is that?
2. List two warning signs of a debt trap.

Answer in complete sentences.

1. Why do you think payday lenders are often located in lower-income neighborhoods?
2. Should buy-now-pay-later plans be regulated like credit cards? Why or why not?

Exit ticket

Name

Name one safer alternative to a payday loan.

Financial Literacy Club

learnwithflc.org

Answer key

Credit & Debt · Lesson 6

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%.

1. D. Almost 400%15% for two weeks, and there are 26 two-week periods in a year: 15% × 26 ≈ 390%.
2. 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.
3. FalseIf you fall behind, the lender can take the car. For many people, that also means losing the way they get to work.

1. $45. About 390% APR (15% × 26).
2. “Guaranteed approval” or no credit check, pressure to sign today, easy rollovers, or holding your car title or a post-dated check.

Answers will vary. Look for reasoning that uses the lesson's key ideas:

An emergency fund, a credit union small-dollar loan, or a payment plan with the company you owe.