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Predatory Lending & Payday Loans Cheat Sheet
A printable reference covering predatory lending, payday loans, APR, loan fees, debt traps, and borrower protections for grades 9-12.
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Predatory lending is when a lender uses unfair, deceptive, or abusive practices to make a loan costly or hard to repay. Payday loans are short-term loans that often charge very high fees and are due on the borrower’s next payday. Students need this cheat sheet to recognize risky loan terms before signing anything. Understanding these warning signs helps protect income, credit, and long-term financial goals. The most important ideas are APR, finance charges, repayment timing, rollover fees, and the total cost of borrowing. APR helps compare loans by showing the yearly cost as a percentage, even when the loan lasts only a few weeks. A small fee can become extremely expensive when converted to an annual rate. Safer choices include budgeting, emergency savings, payment plans, credit union loans, and asking trusted adults or counselors for help.
Key Facts
- APR means annual percentage rate, and it estimates the yearly cost of borrowing using interest and certain fees.
- A payday loan is usually a small short-term loan that must be repaid by the borrower’s next paycheck.
- Total repayment amount = amount borrowed + finance charge + any late fees or rollover fees.
- Finance charge = total amount paid back - amount borrowed.
- Approximate payday loan APR = fee ÷ amount borrowed × 365 ÷ loan term in days × 100.
- A loan rollover happens when the borrower cannot repay on time and pays another fee to extend the loan.
- A debt trap can happen when repeated fees and rollovers make the borrower owe more without reducing the original loan balance.
- A safer borrowing choice should have clear terms, affordable payments, no pressure to sign immediately, and a total cost the borrower can explain.
Vocabulary
- Predatory lending
- Predatory lending is lending that uses unfair, deceptive, or abusive terms to benefit the lender at the borrower’s expense.
- Payday loan
- A payday loan is a short-term, high-cost loan that is usually due on the borrower’s next payday.
- APR
- APR, or annual percentage rate, is the yearly cost of borrowing shown as a percentage of the loan amount.
- Finance charge
- A finance charge is the dollar cost of borrowing, including interest and required fees.
- Rollover
- A rollover is an extension of a loan that usually adds a new fee without fully paying down the original balance.
- Debt trap
- A debt trap is a cycle where a borrower repeatedly pays fees or takes new loans but still cannot repay the original debt.
Common Mistakes to Avoid
- Ignoring APR because the loan is short-term is a mistake because short loans can still have extremely high annualized costs.
- Looking only at the payment due today is a mistake because the total repayment amount shows the real cost of the loan.
- Assuming a rollover solves the problem is a mistake because rollovers often add fees while leaving the original debt unpaid.
- Borrowing the maximum amount offered is a mistake because lenders may approve more than a borrower can safely repay.
- Signing without reading the fee schedule is a mistake because late fees, automatic withdrawals, and renewal charges can quickly increase the debt.
Practice Questions
- 1 A borrower takes a 45 fee due in 14 days. What is the total repayment amount?
- 2 Using approximate payday loan APR = fee ÷ amount borrowed × 365 ÷ loan term in days × 100, find the APR for a 30 fee due in 14 days.
- 3 A 60 fee. The borrower rolls it over twice, paying a new 400 principal. How much does the borrower pay in total?
- 4 A lender says approval is guaranteed, pressures you to sign today, and will not clearly explain the fees. Explain why these are warning signs of predatory lending.