CBS did a segment tonight on "payday" loans (hey, when they're not doing political pieces, they're pretty good on occasion). For the uninitiated, here's how a payday loan works. Imagine you're short of cash, and need to borrow $200 until payday (next week). The lender will lend you the $200 to be paid next week for a $10 fee (i.e. $200 now for $210 to be paid back in a week) . Not a bad deal, eh?
If you work out the math, although it's only 5%, it's 5% per week. This is equivalent to 260% per year even without taking compounding into effect, and works out to over 1100% annually with compounding (yes, that's right, 1100%).
For a link to the segment, click here.
I have family members who almost lost kneecaps to loan sharks (and no, I'm not exaggerating - I grew up in a heavily Italian immigrant mill-town, and a lot of my family managed taverns and bars). They got better terms than this.
It's ironic this came on the television as I was correcting final exams for my students. Although we spent a fair bit of time calculating the interest on loans like these, less than half got this problem right.
Maybe I should start a payday loan service to students...
UPDATE: One of the regular commenters on this blog (The Cynical Professor) sent a link to a site with lots of information on "predatory" lending": www.predatorylending.org. "Predatory lending" is a politically loaded term (kind of like "greed") that means different things to different groups. Regardless of your take on the topic, the site seems pretty interesting. While typing in the link, I found out that if you type in "predatorylending.com" instead of .org, you get sent to a site advertising various loans (ironic, eh?).