Ages 10+ · Money · Credit and loans
Payday loans and cash advances
The bike chain snaps Borrow 10, fee 3 Payday: 13 due Short, so it rolls over Omar's short loan, step by step. The big idea A very short loan can cost a lot for the days it lasts.
How it works A very short loan can cost a lot for the days it lasts. A payday loan means: borrow now, and pay it back on payday.
Omar borrowed ten pretend coins with a fee of three coins, so thirteen coins were due on payday.
When Omar was short, he paid the fee and the loan rolled over: two more weeks, a new fee, and the ten still owed.
A cash advance is a card that gives out cash, with a fee taken at once.
Fees Omar has paid 0 5 10 15 20 3 1 roll 6 2 rolls 9 3 rolls 12 4 rolls 15 5 rolls 18 6 rolls coins Every roll costs another 3 coins, and the ten is still owed. Payday loan • Fee: 3 coins • Due on payday: 13 Cash advance • Fee: 1 coin, taken at once • Owed on day one: 11 Two very short loans of ten coins. Example 1: What is due on payday? Omar borrows 10 coins, and the fee is 3 coins. 10 + 3 = 13 So 13 coins are due on payday. Example 2: Short on payday Omar's pay is 12 coins. Food and rent take 9 coins, so 12 − 9 = 3 coins are left. 13 coins are due, so 13 − 3 = 10 coins short. Example 3: Rolling over Each roll costs a fee of 3 coins. After 1 roll he has paid 3 coins. After 2 rolls: 3 + 3 = 6 coins. After 3 rolls: 3 + 3 + 3 = 9 coins. The ten coins are still owed, so the fees bought time, not a smaller loan. 0 2 4 6 8 10 3 1 roll 6 2 rolls 9 3 rolls coins Fees paid after each roll. Example 4: A cash advance A card gives out 10 coins in cash. A fee of 1 coin is taken at once. 10 + 1 = 11 So 11 coins are owed on day one. Words to know payday loan A very short loan: borrow now, and pay it back on payday. fee The price paid for a loan. roll over Pay a new fee to get two more weeks, with the loan still owed. cash advance A card gives out cash, and a fee is taken at once. Watch out A fee buys more time. It does not make the loan smaller. A fee of three coins on ten, for only two weeks, is a big price for the time. Rolling over again and again costs more each time, and the ten is still owed. A loan's size is only part of the story: the price for the days tells the rest. Try it Omar borrows 10 coins with a fee of 3. How many coins are due on payday? The fee is 3 coins a roll. After 4 rolls, how many coins has Omar paid in fees? Does paying the fee make the loan smaller? A cash advance of 10 coins has a fee of 1 coin. How many coins are owed on day one? Answers: 1. 13 coins · 2. 12 coins · 3. No · 4. 11 coins
Try at home With a grown-up, write three questions to ask before any loan: how many coins in all, when it is due, and what happens if it is late.
For grown-ups This is a story with pretend coins. Practice the three questions to ask before any loan: how many coins in all, when it is due, and what happens if it cannot be paid. A grown-up can help find other ways. Keep it about the story, not about your own family's money.