Once upon a time, a consumer named John found himself in a difficult situation.
He had written a check for $100 to pay for an unexpected expense but soon realized that the check would bounce because he didn’t have enough money in his account to cover it.
He knew that if the check bounced, he would have to pay a $35 Non-Sufficient Funds (NSF) fee, adding even more financial stress to an already difficult situation.
Feeling concerned, John started looking for a way to borrow the $100 he needed to cover the check.
He came across a payday loan company that offered him a $100 loan with an interest rate of 15% and a repayment period of 14 days.
John knew that the interest rate was high and that he would have to pay back $115 in 14 days.
However, after considering all his options, he realized that taking out the payday loan was the best decision. He thought it was wiser to pay $115 in two weeks than to pay a $35 fee in one day.
John applied for the loan and was approved in minutes. His loan proceeds were deposited into his bank account within minutes!
He used the loan to cover the check and avoided the NSF fee.
He knew that his income was stable enough to pay back the loan in 2 weeks, and he made sure to budget accordingly.
Two weeks later, John was able to pay back the loan on time, and he was relieved that he had avoided the $35 NSF fee.
He felt proud of himself for making the intelligent decision to borrow the money he needed and for being able to pay it back on time.
He learned the importance of considering all options and the potential consequences before making a decision and also the importance of budgeting.
He also made sure to have emergency funds for unexpected situations in the future to avoid having to take out a payday loan again.
Typical Bank Overdraft Example (NSF’s are really payday loans by banks and credit unions!)
Overdraft Example:
100 X 365/6 X(170/100-1) = APR
6083.33X.70 = 4,258.33% APR
Total cost to client = $175.00
If a bank customer overdrafts their account by $100 they can be charged an initial $35+ Overdraft Fee for the 1st day, and an Extended Overdraft fee of $35 on the 6th day.
Typical Payday Loan Example:
John borrows $100 for 14 days
Payday loan lender advances $85.00
On payday, John pays the lender a $15.00 fee + the $85 loan principal.
100 X 365/14 X (115/100 – 1 = APR
2607.14 X .15 = 443.21% APR
Total cost to client = $117