Avoiding Payday Loans

February 7, 2007 at 9:21 pm · Filed under Money Management

Thank you all very much for the tremendous response from my first credit tips article. I never expected it to get on digg and I hope a lot of you learned a few new things or will at least get rid of some bad credit habits.

Another common problem that I encounter on a daily basis has to do with payday loans. While these may appear to be a quick and easy way to get money for rent, bills, credit cards, etc., the first loan is simply the start of a cycle where you are continually further and further behind on your payments and in need of even more money. Before you know what has happened, you are left in a downward spiral of overwhelming debt.

In most instances, my clients only need a few hundred dollars to pay their bills, so they head over to a cash advance store and put up their future paycheck in return for a no credit check loan. However, things start to get a little sticky when you discover that this place is charging an exorbitant interest rate, sometimes as much as 25% for a two week advance. To put this into perspective, if you borrow a rather modest $200, you could end paying upwards of $50 for this “quick and painless” loan. And once you have paid off your bills and repaid the loan, you may see that you are still a little short on cash due to the unexpected interest payment, so you need to take out another loan. Well, there goes another $50 dollars, meaning you just paid $100 in interest for a one month loan of $400.

Although throwing away $100 a month will not affect the livelihood of most individuals, the people who are taking out these cash advance loans are usually making minimum wage and working hard to make ends meet. It may appear that these operations are taking advantage of the low-income earners plight, but the government has said payday loan stores are not predatory and fulfill a crucial role for some people. I wholeheartedly disagree with this considering that I have seen first hand how it can destroy a family’s life.

To avoid the steel trap of payday loans, there are a few alternatives that I regularly recommend to my clients. Instead of the 300% or so interest you may pay for a cash advance over the course of a year, try taking out an advance on your credit card, which probably charges under 20% yearly interest. While the interest rate is still extremely high, you can save more of your hard-earned money and put it towards better uses. Other options to consider include asking friends and family for a loan in writing (create a contract) or trying a local credit union, which may be able to help you out with a more reasonable interest rate.

If you are not able to come up with the money on your own, a few last resort methods should be attempted before ever stepping foot in a payday loan store. In some instances your employer will give you an advance paycheck, as long as this is a first time or extremely rare request. Also, you can even contact the companies to whom you owe money. In some instances, the company will allow you to pay a little late to ensure that you do not go deep into debt and can continue to make payments to them in the future.

When a payday loan seems like the only solution to your problem, take a step back to consider your situation and determine how you got into it. Do you need the loan because of bad credit, no credit, lots of debt? While each individual’s problems are different, it is always important to plan for the future and set aside money in advance so you can avoid this difficult and stressful situation. For tips and advice on how to track and budget your money, consider visiting a non-profit credit counselor such as myself. With their advice and your hard work, you can avoid payday loans and break out of the cash advance cycle.

Good luck!

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