Tyrone Newman decided to celebrate Christmas after he finally got a job and kept it for one year. Unfortunately, the Northeast Washington, D.C. maintenance man ended up spending his $1,500 mortgage payment on Christmas gifts. Not wanting to tell his wife that he had no way to pay the mortgage, he got several loans from a payday lender. Newman made $16.50 per hour at his job and whenever he tried to pay ahead on the loans, the lender discouraged him. His three $500 loans would cost $6,000 each if paid off in one year.

Questions:

1. Based on the amounts in the article, estimate whether it would be possible for him to pay off one $500 loan a year, if his expenses were $2,000 per month (using his salary only).
2. Discuss the legality of these types of loans. How was Newman able to get out from under the loans?
3. Look up the FTC case (www.ftc.gov) against payday loans in South Dakota and summarize the issues.
4. What are the journal entries that the payday lender would make for the 1st 2 months, assuming that Newman did not make a payment until month 3.

Source:

Dvorak, P. (2012). “Payday Loan Disaster: A Holiday Splurge Leads to a 651% interest rate,” The Washington Post, March 8 (Retrievable online at http://www.washingtonpost.com/local/payday-loan-disaster-a-holiday-splurge-leads-to-a-651percent-interest-rate/2012/03/08/gIQA9nMOzR_story.html?hpid=z3