When Melissa Hampton needed an advance on her weekly paycheck she borrowed $150 from a local loan store in Prestonburg, Ky., and promised to pay it back plus a fee. Six months later, Hampton was still low on cash, but now owed more than $1,000 in fees to the loan store, which threatened to throw her in jail if she didn’t pay up. “By the time I got off the phone, I was scared to death,” said the 23-year-old Lexington, Ky., housewife, who’s debt eventually forced her into bankruptcy.
Payday loan “businesses” seem to be reproducing at an alarming rate. Just in my small town alone I would guess I’ve seen around 6 of them! In fact, it’s been reported that there are 10,000 such stores in operation with revenues of $2 billion in interest and fees. These “businesses”, or houses of financial prostitution, prey upon those that are either down on their luck or illigally in the country and cannot legitimately open a bank account. Either way, these businesses use flashy advertising and deceptive promises to cover up the horror that is found in their seldom-read “customer agreement” in which you sign away your money, assets, and sanity.
With that said, you can probably guess that my first and foremost recomendation is to stay far far away from any business with the words “check”, “city”, “payday”, “postdated”, “car title”, or “loan” in their title. However if you are one of the too many people have that have received a payday loan – for whatever reason – then read on for some ideas and suggestions for escaping the payday loan death spiral.
- Read Your Agreement – go back and read the initial agreement you signed. Learn about the company’s policies and procedures, its interest rates, and any other information you can glean from the document. That document, and knowing what it contains, might serve you well later in the process.
- Check State Agency – fortunately many states are realizing the negative impact of payday loans and have placed resources available for getting out of the death spiral. Check with your state’s Department of Financial Institutions or similar agency to see what your state has to offer.
- Stop Rolling the Loan Over – sometimes the worst part of the loan is rolling it over. A PIRG report on payday loans reported that in one state 77% of the loans were roll-overs! Each time you roll over your debt for another two weeks, you’re not only paying the loan service fee (anywhere from $25 to $125) but your interest payments are climbing exponentially. Check out the graph below to get a glimpse of what I mean. If you take out a $500 loan and keep rolling it over for 60 days then you are going to pay as much in interest as the amount of your loan – if not more. And keep in mind that this graph is conservative – payday loan interest rates have been reported as high as 1,600%!
- Do NOT Get Another Loan – many people think that by getting a loan form another payday loan store to pay off another payday loan debt is a good idea – IT ISN’T. In the end you’ll end up paying the same amount in interest and fees as if you had just left it at the first house of financial prostitution.
- Cut Expenses – you should treat your situation as seriously as if you were drowning because financially you are. Start to cut expenses – you know, those little things that you “can’t live without.” You would be suprised at how easy it is to part with a cell phone, your Netflix subscription, eating out during the week, etc. Those precious dollars should be paying off that high-interest debt before anything else. You can think about adding those items back to your life after the crisis is over and after you have planned on how not to get into the same situation again.
- Use a CC Cash Advance – I know you’ve been taight to avoid credit card cash advances, but the 35% from the credit card company pales in comparison with 500% from downtown.
- Plan – the next step is to calmly sit down and plan. This is going to take some time, discipline, and sacrifice on your part. Take all of the above suggestions and weight them out – try and think of pros and cons and how they would affect your individual situation. Write the plan down! Refer to it often to remind you that a Mig Mac today is just not worth it.
- 401l Plan – consider taking money from your 401k plan. Any withdrawal will be subject to a 10% penalty and will be added to your taxable income for the year. So youll probably lose 20% of the withdrawal to the federal government. But that’s better than paying 500% APR. Borrowing from your 401k plan would provide the money you need now and allow you to pay it back through payroll deduction. You should speak with the human resources department to find out the details about a 401k loan. The biggest advantage is that money borrowed is not subject to tax penalties or added to your income for tax purposes unless you don’t repay it.
- Overdraft Protection – again, this is costly under other circumstances, but the fees your bank will charge you do not compare to the insane payday loan rates
For those of you who haven’t fallen into the black hole, here are some tips on avoiding or choosing alternatives to payday loans – some of which have already been mentioned.
- When you need credit, shop carefully. Compare offers. Look for the credit offer with the lowest APR – consider a small loan from your credit union or small loan company, an advance on pay from your employer, or a loan from family or friends. A cash advance on a credit card also may be a possibility, but it may have a higher interest rate than your other sources of funds: find out the terms before you decide. Also, a local community-based organization may make small business loans to individuals.
- Compare the APR and the finance charge (which includes loan fees, interest and other types of credit costs) of credit offers to get the lowest cost.
- Ask your other creditors for more time to pay your bills. Find out what they will charge for that service – as a late charge, an additional finance charge or a higher interest rate.
- Make a realistic budget, and figure your monthly and daily expenditures. Avoid unnecessary purchases – even small daily items. Their costs add up. Also, build some savings – even small deposits can help – to avoid borrowing for emergencies, unexpected expenses or other items. For example, by putting the amount of the fee that would be paid on a typical $300 payday loan in a savings account for six months, you would have extra dollars available. This can give you a buffer against financial emergencies.
- Find out if you have, or can get, overdraft protection on your checking account. If you are regularly using most or all of the funds in your account and if you make a mistake in your checking (or savings) account ledger or records, overdraft protection can help protect you from further credit problems. Find out the terms of overdraft protection.
- If you need help working out a debt repayment plan with creditors or developing a budget, contact your local consumer credit counseling service. There are non-profit groups in every state that offer credit guidance to consumers. These services are available at little or no cost. Also, check with your employer, credit union or housing authority for no- or low-cost credit counseling programs.
- If you decide you must use a payday loan, borrow only as much as you can afford to pay with your next paycheck and still have enough to make it to the next payday.
Hopefully after reading this you understand the gravity of payday loans. So please do me a favor and promise me you’ll never EVER get one!