How Does a Payday Loan Work?
- Initial payday loan: The borrower writes a post-dated check for the payday loan amount plus any fees. For example, to borrow $500 for two weeks, the borrower writes a $575 check.
- The loan rollover: The borrower assumes they will have enough money in their bank account in two weeks to pay off the payday loan. However, 90% of our profit is generated from borrowers who are not able to pay off the loan and are forced into a debt trap1.
- The debt trap: The borrower takes out an additional payday loan to pay off the old loan. The average borrower takes out 9 payday loans per year2. On a $500 loan with $75 in fees every two weeks, this is $675 in profit at a lucrative 390% APR.
Is your debt trap sticky enough? The PLA white paper Enhancing Your Debt Trap demonstrates how to balance the borrower's supply of money with your demand for loan fees.
Profit from lack of financial knowledge: PLA members know that 40% of borrowers believe their payday loan rates are less than 30% APR3. Join the PLA to learn how to comply with the Truth in Lending Act without risking an increase in the financial knowledge of your customers.