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Current time:0:00Total duration:10:26

Video transcript

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 1 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 it works is let's say that you know 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 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 lender 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 in your pay date so let me sit with it they want your they're going to want to see your pay stub pay stub they're going to they want to know when you're going to get paid so your pay I guess we could call it your payday your payday and they might want some recent bank statements some recent bank statements and the whole reason why they want these things is is they want to know you know even though your credit might be horrible that you're going to get a you're going to get a your salary or you're going 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 the $500 and to insure this so one they're going to make sure that you have a job that you and your pay stub maybe you make a thousand dollars every two weeks or maybe you make $2,000 every two weeks so that you're good for this so maybe it's you know 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 two weeks from today and then your bank statement shows that your bank kind of goes up $1,500 then you pay the rent in the food 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 what we're going to do we're going to give you the $500 today what we want to do is you need to write us a check and on that check let me let me draw a check right here so this is a check that they want you to write we want you to write a check for not $500 for every hundred dollars you borrow so for every hundred dollars borrowed borrowed you want I want you to pay us back another twenty-five dollars so $25 extra and at first you might say hey that's not bad that's 25% interest it's high maybe it compares to some interest to some credit cards but this isn't 25 percent a year this is 25 percent for two weeks and at the end of this video we're going to do a little bit of math on what that actually count 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 hundred dollars so I'm borrowing five hundred dollars so I'm gonna have to do plus 5 times 25 or or $125 so I'm going to write them a check for 500 plus 125 so that's six hundred and twenty-five dollars six hundred and twenty-five dollars right there 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 but I'm going to doing 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 first instead of January first I'm going to put 116 and you know whatever year I might be doing it so I'm forward this is two weeks from today two weeks in the future and then you know I'm going to sign I'm going to sign the check and well maybe usually you sign the I'll sign the check and I'll write it's for payday payday loan and I'll write six I'll write 600 I'll write out the words 600 and exit 25 et cetera et cetera and 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 hit you have an option you can come back to us and give us 625 625 dollars 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 aren't going to happen but effectively they're going to if this if you didn't lie to them they're going to essentially charge you six hundred twenty-five dollars and you can imagine it is risky for the lender because these are people with you know 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 that that payment from the employer comes in that they get first dibs 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 started off saying that it's probably not a good idea and you've 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 8pr basis so let's say we're paying so $25 for every 100 that's sort of 25% when you say per cent cent that root means 100 right century hundred years so percent literally means per 125 400 so this is literally 25% interest or we could write it in the traditional way this is 25% interest interest per two weeks per two weeks so if we were to just calculate a simple APR a simple annual percentage interest rate annual percentage rate percentage rate and you might want to watch the video on that to understand that that just takes your 25% you're 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 it by there's 26 two week periods in the year so times 26 two week periods periods per year and this is 25% per per two weeks and when you multiply this out this is equal to let's get the calculator out so you have I'll just multiply the numbers I want to do as a decimal 20 let me turn it on 25 times 26 times 26 is equal to 600 50 percent we're paying an APR of 650 percent so if you thought the credit card companies were charging a lot of interest charging you a I don't know a mid-teens interest rate or 20 percent interest rate this is six hundred and fifty percent it's a it's an order of magnitude or two above what even credit cards charge you 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 you lend that out at the same rate to figure out that effective annual percentage rate you do 1.25 right 25 percent 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 320 well let me be very clear we're going to we're going to be essentially this is 300 this is 3 hundred twenty nine times our money so this was a one here that would be one hundred percent so this is let me just be clear this number right here that number right there it's such a high number it's hard to fathom if you were to actually let money compound at this rate and usually they wouldn't let you just they make you at least roll over the principal so this may or may not be accurate but the actual payday lender if the money if they actually do are able to roll over the money at this rate they're going to have three hundred twenty nine times their money if you write it as a percent it would literally be three let me make sure I get the three two nine eight seven literally thirty two thousand nine hundred and eighty seven percent or after a year you will essentially have to pay roughly three hundred thirty times your money back to the 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 usery usery 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 twenty percent interest or thirty percent interest or forty percent annual interest but I think everyone would agree that whether you look at six hundred fifty percent or 33 thousand percent these are userís and unreasonable interest rates so you really at all costs unless it's you know your life depends on it you want to avoid these payday loans