Finance: What are Payday Loans?

A payday loan is a loan using the promise of delivery of cash on your payday check as collateral. Disappointingly, it has nothing to do with the candy bar Payday.

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Transcript

00:27

commercials you're seeing out there a payday loan is a loan using the promise

00:31

of delivery of cash on your payday cheque as collateral and for most

00:36

companies loaning money on payday this is an extremely profitable business

00:41

because they quote only charge you 2% unquote for the loan but let's do the

00:47

math you're getting the cash two weeks early and last time we looked at a

00:51

calendar there were 52 weeks in a year or 26 bimonthly pay periods so if

00:57

they're charging you 2% to lend you money for one of those bimonthly pay

01:02

periods well their annualized rate that they're charging you for lending you

01:07

that money well that's 52 percent a year right 26 times 2% it's 52 percent a year

01:14

even the worst credit cards charge dramatically less than this rate of

01:18

interest so how do payday loan places get away with such high rent on your

01:22

hard-earned money well if you have to borrow money in this form with such

01:27

urgency well you're likely a very bad credit [woman sends man out to pay grandma]

01:30

risk and the perceived odds of you simply vanishing are well they're high [man gets into car with suitcase]

01:35

and the odds you are financially unsophisticated are almost by definition

01:40

certain because if you did do the math you get even an expensive credit card to

01:45

float you the thousand bucks or whatever your paycheck was or five hundred

01:48

dollars for that half month period to just get by until the next month right

01:52

so if you ever find yourself needing a payday loan let's hope you can work a

01:56

few long weekends saving enough money so that you don't need these things anymore [man working on computer]

02:00

and next time well you know what they say stay in school [school kids collaborating on project]