Payday Loan, Expiring 0% Card, and a Debt-Settlement Pitch
The Ramirez household: Mr. Ramirez earns $54,000 gross; monthly take-home is $3,520. Rent $1,175; utilities average $240; groceries $650; car payment A $395 at 18.4% APR with 41 months left; car payment B $265 with 19 months left; credit card A balance $4,300 at 24.99%, minimum $95; credit card B balance $1,850 at 0% until March 31, then 27.99%, minimum $60. Their checking account holds $210 and payday is in six days. A $500 payday loan has been rolled over twice at $75 per rollover. Mrs. Ramirez wants to enroll both cards, $6,150 total, in a debt-settlement company that charges 18% of enrolled debt and advertises 'pay about 60 cents on the dollar.' Mr. Ramirez contributes nothing to the 401(k); his employer matches 100% of the first 3% of salary. Their only savings are $400 in a Christmas club account at 1%.
1. Calculate the true annualized cost of the payday loan and lay out what the family should do in the next six days.
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The math: $75 ÷ $500 = 15% per 14-day term. Annualized: 0.15 × (365 ÷ 14) = 0.15 × 26.07 ≈ 391% APR. Two rollovers already cost $150 - 30% of the principal - and the $500 is still owed. If they roll again they will have paid $225 to rent $500 for six weeks.
Six-day plan:
- Pay it off in full from any legitimate source: sell something, request a written due-date extension, ask an employer for a payroll advance, or use a credit-union small-dollar loan (roughly 28% APR, still far cheaper).
- Ask the lender in writing for a repayment plan; get the balance and payoff date in writing.
- Do not take a cash advance on card B to cover it. Cash advances usually carry a fee around 3–5% and immediate interest, and on some accounts a cash advance can jeopardize the promotional rate.
- Do not take a new payday loan to pay this one; that is the rollover trap by another name.
The judgment point: the family's instinct will be to protect the credit cards and let the payday loan ride. That is backwards - 391% is roughly sixteen times the cost of card A. Sequence by rate, not by which bill feels most threatening, and note the household has only about $640 left after obligations, so the payoff has to come from an asset sale or a temporary income source, not from cash flow.
2. Evaluate the debt-settlement offer against a nonprofit debt management plan. What did the salesperson omit?
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The fee math: 18% of $6,150 = $1,107 due to the company regardless of outcome. Add an optimistic 55% settlement ($3,383) and the family pays about $4,490 - but only after the company tells them to stop paying the creditors for many months.
What that omission costs:
- Delinquency, charge-offs, collection calls, and possible lawsuits and wage garnishment in a state that permits it.
- A serious credit-score drop that lingers on the report for about seven years - exactly when they may need to refinance car A at 18.4%.
- Forgiven debt over $600 is generally reported on Form 1099-C and is taxable income unless the family can prove insolvency.
- '60 cents on the dollar' is a projection, not a contract term; the creditor can refuse.
The alternative: a nonprofit agency affiliated with the National Foundation for Credit Counseling runs a debt management plan - typically a modest monthly fee, negotiated rates near 8–10%, accounts kept current, payoff in four to five years, no default required. Given the household's thin margin, a DMP plus the payday payoff is the defensible recommendation. If they still consider settlement, they should get the fee structure, refund policy, and state registration in writing first, and compare the total paid under both paths.
3. Sequence the next twelve months across the payday loan, both cards, an emergency buffer, and the 401(k). Show the comparison you would use to justify the order.
Read the worked answer
Rank by rate, then by risk: payday 391% → card B 27.99% after March 31 (currently 0%) → card A 24.99% → car A 18.4% → the 401(k) match.
- Days 1–6: clear the payday loan. Nothing else competes at 391%, and it is unsecured with no asset to show for it.
- Before March 31: confirm whether card B's promotion is truly 0% or deferred interest - with deferred interest, any remaining balance triggers retroactive interest on the whole original balance, which would dominate everything else. If it is deferred, paying B down takes priority over A until the deadline.
- Then attack card A ($4,300 at 24.99% costs about $90 per month in interest) by redirecting the $95 minimum plus the $75 that had been going to payday fees.
- Build a $500–$1,000 buffer in a separate account at a credit union, so the next car repair does not become another payday loan. This is not optional; it is the mechanism that keeps step 1 from recurring.
- Capture the match. Three percent of $54,000 is $1,620 a year, about $135 a month, and the employer match is an immediate 100% return. Normally that beats a 27.99% card, but not when the household cannot cover minimums. The defensible sequence is: kill the payday loan this month, then enroll at 3% even while carrying card balances, because the match is free money they will never recover from a prior year.
Be explicit with the family about the trade-off: everything above is avalanche ordering, and it requires the buffer, or the plan collapses at the first emergency.