Payday Loans | Interest and debt | Finance & Capital Markets | Khan Academy


I think most of us have a sense
that payday loans are probably not the best source for
a loan, that they probably charge a lot of money to those
people who need that cash really badly. And what I want to do in this
video is one, explain what they are but even more do
a little bit of math to understand really how bad of
an interest that they do charge, So the way that works is let’s
say that I need to buy my wife a nice gift for her birthday
that’s tomorrow and I want to borrow $500. So I want to borrow $500. I would suspect that most people
aren’t borrowing it for some type of a gift, they’re
desperate to make the rent or pay the utilities or buy food
or who knows what else, but whatever your reason, you need
to borrow $500 and I would suspect that you have very
little in your bank account, otherwise you wouldn’t go
to the payday lendor. And they say all right Sal,
we’re open to lending you $500 and we’re not going to do all
of this deep research on how good of a credit you are and
all of that, but we want a couple of things. One, we want to know your pay
stub and your pay date. They’re going to want to see
your pay stub, they’re going to they want to know when you’re
going to get paid, so I guess we call it your payday. And they might want some
recent bank statements. And the whole reason why they
want these things is they want to know you know even though
your credit might be horrible, then you’re going to get your
salary or you’re going to to get a payment from your employer
probably in two weeks on your payday, and then you’re
going to be good to pay back to the $500. And to ensure this, so one
they’re going to make sure that you have a job, that in
your pay stub maybe you make $1,000 every two weeks or maybe
you make $2,000 every two weeks so that you’re
good for this. So maybe you maybe make $1,500
every two weeks, so they like to see that. Maybe your payday is two weeks
from the day that you’re borrowing it, borrowing
the money. So two weeks from today. And then your bank statement
shows that your bank kind of goes up $1,500 and you pay the
rent and the food and then it goes back close to zero, then it
goes up to $1,500 but they want to see that this $1,500
is hitting periodically. And they say, you know,
we’re going to give you the $500 today. You need to write us a check. We want you to write a check for
not $500, for every $100 you borrow, I want you to
pay us back another $25. So $25 extra. And at first you might say,
that’s not bad, that’s 25% interest. It’s high, maybe it
compares to some interest, some credit cards. But this isn’t 25% a year, this
is 25% for two weeks. And at the end of this video,
we’re going to do the map on what that actually turns
into on an APR, or an effective APR basis. And these numbers are not crazy,
these are actually very typical for payday loans. So if I’m borrowing $500, I
have to give them back the $500 in two weeks plus
$25 for every $100. So I’m borrowing $500, so I’m
going to have to do plus five times 25 five or $125. So I’m going to write them a
check for $500 plus a $125 so that’s $625. I’m going to write a check, but
obviously I don’t have the money in my bank account right
now, otherwise I wouldn’t even be going to the payday loan. What I’m going to do on
the date, I’m going to forward-date this check. I’m going to put the date, let’s
say this is the first of the month, instead of let’s say,
it’s January 1, I’m going to put January 16 and whatever
year I might be doing it. So I’ve forwarded it, this
is two weeks from today. Two weeks in the future, and
then I’m going to sign the check and I’ll write it’s for
a payday loan and I’ll write $625 etc. etc., then I have my
little information here. And I’m going to give them this
check and what they’re going to say is we’re not going
to cash this, we’re just going to keep this nice little
check for us and when your payday hits you have
an option. You can come back to us and give
us $625 in cash and then we will give you back this check
that is uncashed or if you don’t show up, we are just
going to cash this check. So one of these two things
are going to happen. But effectively, if you didn’t
lie to them, they’re going to essentially charge you $625
and you can imagine it is risky for the lender or because
these are people with you know be maybe shady pay
stubs and obviously they’re desperate, so they weren’t
good at managing their finances, but they’re doing
their best to ensure that once that payday comes in, once
that’s that payment from the employer comes in, that they
get first dibs was on the money before the person can
pay their rent or their utilities or their food. And so that’s the general
idea behind it. Now we start off saying this
probably not a good idea and you got a sense of that, because
we’re essentially paying 25% interest for every
two weeks, not for every year. But let’s think about what
that is on an APR basis. So let’s say we’re paying $25
for every $100, that’s really 25 per cent. When you say per cent, that
root means hundred, right? Century, 100 years. So per cent, it literally
means per 100. 25 per 100, so this is literally
25% interest or we could write it the traditional
way, this is 25% interest per two weeks. So if we were just calculate a
simple APR, a simple annual percentage interest rate, and
you might want to watch the video on that to understand that
that just takes your 25% and then multiplies by the
number of periods in the year. So we have 52 weeks per year,
but this is every two weeks, so instead of multiplying it
by 52 weeks, we’re going to multiply by there’s 26 two-week
periods in the year. So times 26 two-week
periods per year. And this is 25% per two weeks. When you multiply this out, this
is equal to– let’s get the calculator out– I’ll just
multiply the numbers, I won’t do the decimals. 25 times 26 equal to 650%. We’re paying an APR of 650%. So if you thought the credit
card companies were charging a lot of interest, charging you
a mid teens interest rate or 20% rate, this is 650%. It’s an order of magnitude
or two above what even credit cards charge. So this is a really, really,
crazy annual percentage rate and this was just a simple
annual percentage rate where we multiplied it by 26, this
isn’t the effective annual percentage rate, or the actual
mathematically correct one. To do that, we would actually
have to take– and you might want to watch the video on
this– if you were to let that just compound, and you can
imagine if you’re the payday lender, you are essentially
getting that compounding if you keep lending your money
out and if you lend the interest you get from the last
person, and you lend that out the same rate. To figure out that effective
annual percent rate, you do 1.25, 25% plus 1 to
the 26th power. We have 26 of these
periods in a year. And what is that going
to be equal to? So we have 1.25 to
the 26th power. And then we get this crazy
number, we’re going to want to subtract a 1 from it, not
that it’s going to change much of our math. So minus 1, and we get, well
let me be very clear– essentially this is 329
times our money. So this if this was a one here,
that would be 100%. So let me just be clear, this
number right here that number right there is such a high
number it’s hard to fathom. If you were to actually let
money compound at this rate, and usually they would make
you at least roll over the principal, so this may or may
not be accurate but that actual payday lender, if they
actually are able to roll over the money at this rate, they’re
going to have 329 times their money. Or if you write it as
a percent, it would literally be 32,987. Literally, 32,987%. Or after a year, you’ll
essentially have to pay roughly 330 times your money
back to the payday lender. And obviously they don’t let
you compound like that, but this just gives you a sense
of how ridiculous this interest rate is. I mean, you might have heard
of the term usury. In the past, usury really meant
any kind of interest, but now in our current cultural
context we associate it with just an unreasonable
level of interest and that threshold might be different
for some people. Some people might say it’s
unreasonable to pay 20%, or 30% interest, or 40% annual
interest. But I think everyone would agree that whether you
look at 650% or 33,000%, these are usurious and reasonable
interest rates. So you really, at all costs,
unless your life depends on it, you want to avoid
these payday loans.

71 comments on “Payday Loans | Interest and debt | Finance & Capital Markets | Khan Academy”

  1. MustNotRead says:

    borrowing is evil

  2. PsychoticusRex says:

    Remember, Payday loans pop up around colleges, universities and army bases where those living on minimal incomes and leveraged debt can be taken advantage of. You would LITERALLY be better going with the Mob. I've never heard of even the Hells Angels charging more than 70% interest. So, lesson, organized crime syndicates are more honest than Payday loans.

  3. FortNikitaBullion says:

    Rule of thumb: It's usually a lot easier to just scale back than to rely on payday loans: eat cheaper, move to a cheaper place, work an extra job, sell stuff, basically exhaust EVERYTHING before you even think about the words "payday loan". Trust me, I've done all 4 of those and they don't trap you.

  4. FortNikitaBullion says:

    The 33,000% is only if nobody defaults. I'm sure the default rate on these loans is quite high. Not to say these businesses don't make a lot of money.

    Another issue is that these places loan real CASH, as opposed to bank credit. So they can only lend capital they have on hand, as opposed to 10 times as much.

  5. FortNikitaBullion says:

    @StarSeeker5000 Can't they just check the paystub to see who's name is on it?

  6. FortNikitaBullion says:

    @PsychoticusRex Yea, but Payday Loan centers won't kill you and (hopefully) are on the right side of the law.

  7. unytcommsys says:

    I like this video. It is a lot cleaner looking than the others. Thanks for improving the video quality.

  8. paulceltics says:

    no good music

  9. royg6852 says:

    We have bad credit and got a loan with fastcashvegas com without any problems, but they actually link to installment loans which for us was better than most payday loans

  10. uweakminded twit says:

    There wouldn't be payday loans shops if people would stop going to them.Some poor people get what they deserve when they refuse to get a higher education,or live paycheck to paycheck without ever saving any money when emergencies arise.

    Read the fine print
    You will be paying them back more money than they will give you.

  11. Robert Foth says:

    There is a benefit to a payday loan for someone strapped for cash in an emergency. If you have a $100 bill that is due (and you currently have no money) a person can choose to pay a late fee and pay when you have the money or you can choose to get this short term loan. What you have too look at is it worth the fee they charge in relation to the overall fee for paying late.

    For instance in this case if the late fee were $35 – it would be worth paying the payday loan company the $25 ($10 less)

  12. Robert Foth says:

    @fothpima Just want to make it clear … I would avoid this at all cost, but you do need to analyze your own situation and make an informed decision (choosing a lesser of two evils in some cases).

  13. FortNikitaBullion says:

    @fothpima The problem is there are alternatives to both, sell something, do an odd job, call the creditor you owe $100 to. A lot of people don't like to problem-solve and jump into payday loans (or whatever they happen to hear of on the TV at the moment).

  14. Robert Foth says:

    @FortNikitaBullion But if that "odd" job is not an option (or selling something) this still gives people an option to not be late on a bill in an emergency (I personally would avoid this like I said before – it is just not that simple in all cases to do what you said, so a small plus for their existence … and I do mean small).

  15. FortNikitaBullion says:

    @fothpima I disagree that the $25 interest is better than the $35 late fee. A late fee generally is due once. Most people will take a payday loan over and over and over. If you find yourself in a bind without a loan due, how can you live AFTER paying the loan?

  16. Robert Foth says:

    @FortNikitaBullion Thats where you are making an assumption about the circumstance for which I think there is some benefit for doing the payday loan. I agree people do get into bad situations, but the intent of my coment was to say if it is a one time deal and not a continuous money problem then this would make financial sense (if money was not going to be there in the future than other alternatives should be investigated).

  17. FortNikitaBullion says:

    @fothpima yea, but one dose of heroin or one cigarette probably won't kill you either. Payday loans are one of those things it's best not to touch to begin with.

  18. FortNikitaBullion says:

    Can you do a video about loan sharking?

  19. Ali Hawk says:

    is this the same as payment-in-kind (PIK) loans?

  20. sol05033149 says:

    kwickquid.co.uk is quite good

  21. Thehours1000 says:

    Hate these places. Just to teach them a lesson, I went and borrowed $1500 from these payday lenders. I didn't pay back. I was threatened, told that I was commitung fraud, told that it would go on my credit report. I laughed and and was equally rude to the collection guys on the phone. I told them that they would not ever get a cent from me. "We'll garnish your wages," they said. Only in your dreams I said. This was 6 years ago. They never did follow up on their threats.

  22. Thehours1000 says:

    I moniter all 3 of my credit reports every month. It's clean. Those guys never did send it to my credit report. All I did was close my bank account when I got my loan. Eventually I changed my number cause they wouldn't stop calling. Oh yeah I ended up switching jobs to so it was not like they could call my workplace. The references I put on the app? Fake numbers. The girl never bothered to check BEFORE giving me the $1500. So, thank you payday lender! I truly enjoyed spending free money!

  23. FortNikitaBullion says:

    @Thehours1000 Does this scam still work today?

  24. onenickelmiracle says:

    These places are owned by the big banks. So borrowing to avoid overdraft fees, they get paid anyways.. These places are organized crime made possible by paid off politicians. It's OK for the government to be trillions in debt, but if you cannot pay up, go to jail scum.

  25. Stanley YelnatsDotCom says:

    There is a 3rd option not touched on in this video. You don't have the $625 after the 2 week period in you bank account. So you go into your friendly neighbor payday loan store and pay the $125 and you get an extension.

    Now you have paid the $125 and still owe the $625.

    So, in 2 weeks you don't have the $625. Yo go in and pay the $125 for another extension.

    You have now paid $250 and still owe the $625.

    See the pattern developing?

  26. Stanley YelnatsDotCom says:

    Maybe he did touch on the pattern I suggested, only in a different way.

  27. Bridget Hendricks says:

    These loans should be used responsibly

  28. shane tucker says:

    paydaymonster.co.uk/?AID=QUIDDI_483&SAID=REPLACEWITHVALUE
    click the link above and save 25%

  29. Tim M says:

    Some people NEED this money, and they cant get it anywhere else, even if its 25%.

  30. PsychoticusRex says:

    It's not 25% it's 32000% per year for the mathematically challenged. It's pure usury. You might long for the days of company script, the town store and being owned outright by your employer, I for one do not. LOAN SHARKS are more honest than "payday loan" outfits.

  31. WaterReignFire says:

    Payday Loans should be viewed as a SHORT TERM LEVERAGE! The 1st two payments to pay off the loan in full is good but once you go beyond that then you're in a losing position. I've been with payday loans for a while and it's never been a problem because you must know how to be responsible for all your personal monetary management. The finance charge is far better than hearing a relative or friend bringing up the time you 'borrowed' when there's dissension down the road…tbc

  32. IndiePharm says:

    Hey, the moment I told my pals that I was going to go earn a living online, they teased me. But after that I showed them my cash flow. Go and Google Tube Cash Exposure to learn simple methods to make money online.

  33. Lenin Munoz says:

    Business Question: What is the percentage of people paying back these loans? Do they really pay them back? They must be if there a lot of businesses providing these services.

  34. Tim Koester says:

    It's good information to know, because then you can act accordingly.

  35. Buck Advance says:

    How do payday loan companies verify your identity as they don't do credit checks? they ask for your national id

  36. John Smith says:

    Amen!

  37. Best Videos To Watch says:

    The best 2013 online payday loans is greendotloans(.)com
    They will take care of you and send your loan to your checking
    account.

  38. Snugloans us says:

    Lenders from our brokering site, provide small cash loans fast to pay urgent expenses. You can take cash with us and can make repayment on your next payday directly.

  39. logg boom says:

    or you can go here. check it out!! adf..ly/Ka7E8(remove 1 dot)

  40. Egao No Genki says:

    Credit cards: The Payday Loans for lendees with BETTER credit!

    You think 30% APR store-cards are epic rip-offs, but they feel more like grants from your parents when you factor in that the payday loan interest rates are >600%!

  41. Rrneewest D says:

    It's good information to know

  42. Alex Kunin says:

    how get easy, just simple

  43. reshi p says:

    Urine Idiot

    No one forces you to take out these loans,

    Do like most normal people, save up your money

  44. onenickelmiracle says:

    Never have. You think you're smart, but you're a moron.

  45. Mac Ten says:

    omg.. this is an awesome business. i need to get in

  46. Shlomo Wassergoldbergshekelowicz says:

    Thank you! This video will be very helpful for my future business ventures.

  47. Dawn Bringer says:

    actually the payday loans we've been seeing are 200 to 400 apy.

  48. Lera Thomas says:

    Do you need some money fast & very simple? Well, there are many payday online borrowings services that can help you out of any tacky economic position. I endeavoured a wide variety of them and finally have discovered the best one! Now you may ascertain out this good and dependable service yourself. Just bang HERE for getting instant money in your bank account! best loans web sites : quickdoorstep12monthloansnoguarantor.co.uk/

  49. Stephen Bolt says:

    Amazing video would love to see more from you. Now a days many people are using payday loans to solve out their financial problems. It is the most easiest way to get money during the financial emergencies. I am also willing to apply for a payday loan. Many of my friends recommend 1stratelendes(dot)com. It is a trusted company and they provide money very quickly.

  50. Chicago Payday Loans says:

    payday loans is good for as long as you are going to use your fast cash to your urgent but meaningful purpose.

  51. daere says:

    strongly agree…

  52. Payday Loans says:

    Payday loans is as good as you are capable of paying it at a given period of time.  Payday loans online could be more comfortable and quicker for those who have hectic time and in need of fast cash. Cash is liquid, so use it wisely for what is it intended for.

  53. LShy3142 says:

    No one who gets payday loans is watching this.

  54. Jenna says:

    Gᴇᴛ Pᴀʏᴅᴀʏ Lᴏᴀɴs Fᴀsᴛ ᴀᴛ: LegitCashLoans. com

  55. Russell Lee says:

    thieves

  56. murari kumawat says:

    please good ideas send of lone in hindi motivation videos

  57. BOBBIE JARRETT says:

    PAY DAY LOANS IS ANOTHER FORM OF LEGALIZED LOAN SHARKING,MINUS THE BROKEN LEGS IF YOU CAN'T PAY IT BACK!

  58. DJFU999 says:

    So what happens if there is no money in the account and the check bounces?

  59. GHB says:

    I really love the way you present the calculation, especially on percent increase (8:16), I did a similar thing (at that video time) on finding the total of a taxed product instantly, for example: Michigan's (the place I'm in) tax rate is 6% and I'm buying a product that is $3.99, do [3.99*1.06] and the result should be 4.2294 ($4.23 rounded to nearest cent).

  60. Penny Grant says:

    Payday loans are a big rip-off everyone, do your best to stay away from them!

  61. savory icon says:

    Government should intervene and restrict the loaners from charging such ridiculous rate if interest, the borrower will borrow even at 1000%, he will not do the math, it's like a drug and they will borrow no matter what. Amendments should be made.

  62. Michael Kerr says:

    the second video is jsut wrong.

  63. darthrudious says:

    Irresponsible dead beats are the only ones who use payday loans.

  64. Ana says:

    revejam as legendas em português

  65. Mr: Rajesh A says:

    Nice! You guys should also check out https://cashkumar.com/personal-loan for some quick help!

  66. Steven Johnson says:

    Lol they have to get paid too! I think it's fair. Especially considering the fact that the person applying for the loan has damaged or no credit.

  67. Short Perverted Loner says:

    21 dislikes from Payday loan company XD

  68. PiranhaJaw22 says:

    the borrower must show direct deposit, right?

  69. Dominick Asare says:

    It is very fair the interest they charge. You figure, this can be risky for the person loaning the money as well. And usually, if someone needs money that quick, they have understand that they would have to pay something like that. It is take it or leave it. Ppl shouldnt complain about the intetest.

  70. Sangone J says:

    Payday loan is the most predatort business out there. Good thing that govt is passing regulations to outlaw or partially restrict payday lending practice

  71. Bender Bending Rodriguez says:

    Capitalism at its finest.

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