From the Desk of San Diego Attorney Daniel Gamez:
I am a proud father of three children, my oldest a seven year old boy. When he grows up he wants to be a builder. Some days he changes his mind and wants to be a lawyer, but that is always short lived. The evidence is in his room. On a desk, window ledge, bed frame… everywhere you look are Lego sets he has built, stacked towers from random assorted toys, and drawings of things he wants to build (robots, jet packs, a real life angry birds amusement park – typical boy stuff).
This past weekend we were out at a store and he saw this cool building set he wanted. Only problem? It costs a little over $100. I asked him how much he had from saved allowance. $32 mumbles the boy. Helping him with his first-grade math skills, we determined that he was $68 short. Sadly, he crawled into the back seat of my car empty handed, buckled up and dejected. He didn’t think it was fair that I wouldn’t just give him the additional money needed to make the purchase. Then his mind started to work. He was so proud to think of the idea on his own. We could just give him the $68 now and he wouldn’t ask for an allowance until he caught up with what we had given him. I mumbled, “sounds like a payday loan to me.” Of course, he asked what that was. Curiosity turned to regret when I told him I would explain it to him at home on the computer.
So we got home and I explained to him that what he was asking for was a loan. We talked about how a loan works and how there are people out there in the world that will loan him the money to buy the toy, but they would charge him extra money. Not fair, the boy protested! So we sat down at the computer and found a payday loan calculator so I could show him the true cost of borrowing the money to buy the toy. In short order we determined that the smallest amount you can borrow would be $100. So he agreed that he would borrower the entire amount to purchase the toy and use his savings to help pay it back. The bank would charge him $30 for the loan if he agreed to pay the entire balance out over 60 days. The result? An APR of 182.50%.
The APR discussion would have to wait another day as I was already pushing the limits of this lesson (Legos were calling his name). So to put it in simple terms for him, I explained that he would have to pay back an extra $30 for the privilege of borrowing the money to buy the toy. His response? “Dad, that’s just dumb. Why would anyone do that? It doesn’t make any sense!” I had no answer for that. He mumbled something about people being weird and that I was boring him. And off he went to play.
He hasn’t asked about the building set again. I guess he has decided that it’s better to save the money and pay for it all at once. I’m stopping at the store tonight on the way home to get it for him. His mother and I have decided that we will give him a 0% advance on his allowance as a reward for listening and learning about the absurdity of a payday loan. Some people might say we’re spoiling him by giving in. But he got the concept of the negative aspects of a payday loan. And to me, that’s well worth it.
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