Don't Fall into the Payday Loan Trap
A payday loan is a short-term loan that is intended to be paid off with your next paycheck. Payday loans are often used by people who are short of cash to pay for emergency expenses. They are prohibited in many states because they are considered predatory loans that charge unreasonably high interest rates and fees, which make them very hard to pay off. Because they’re so hard to pay off, they can trap people in a cycle of debt for years. How can you avoid these loans when you really need the cash now? Keep reading.
Consider this scenario…
Imagine you’re at home, worrying because you hear a big storm is coming and you haven’t been able to put snow tires on the family car. You may have to commute far for work or school and may not have other options such as public transportation available to get you where you need to be. What do you do? Unable to sleep, you channel surf the late-night television shows and an ad catches your eye. “Need money fast? Have a dependable income and a bank account?” You nod your head yes and listen intently, realizing you can get a deposit made into your account in as little as 24 hours. Problem solved!
You apply online (or call their handy 1-800 number) and the money is deposited into your account as promised. The next day you get the tires on and you are ready for winter. But wait…of course there is a catch. The next time you get paid, you are supposed to pay the entire amount plus interest and fees, which can be as high as 400%. Now you have a new issue—if you pay the entire amount back at one time, you won’t have enough money left over to pay your “regular” bills.
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You have a couple of choices at this point—pay the whole thing off, be short on your bill payments and wait for that fallout or take out another loan. The company is happy to assist you with another loan because it means more fees for them. It has been reported that 70% of the people who take out one payday loan, take out a second one. And that 20% take out 10 pay day loans, one after another—all because of the original debt. The borrower can end up paying more in fees than the original loan amount, and still have the loan amount due! Many folks realize they are just kicking the problem down the road, but desperate situations require desperate measures (or so they think).
Better measures for desperate situations
If you find yourself in a situation like the one described above, remember that many of your local credit unions and banks specialize in small loans for emergency needs like tires. And even if your credit isn’t the greatest (I mean, who hasn’t struggled?), oftentimes there are alternatives to a payday loan that are designed to accomplish the same thing—small loans that are quick but don’t come with the ridiculously high fees and interest and too-short repayment terms.
Build your savings
Like they say, an ounce of prevention is worth a pound of cure. The best defense against the harmful effects of a payday loan is to never take one out to begin with. Instead, build up your savings. Even a small amount of savings can give you some financial freedom. Be sure to put money away for yourself before you pay all other bills. If you wait until all your bills are paid before you put money into savings, you may find you never have anything to put away.
Control your credit card use
Credit cards can also get you into trouble. If you have a credit card, be sure not to max out the credit line. Only charge things that will last longer than it takes to pay them off. That means: don’t charge a night out to dinner, but charge those snow tires. The repayment fees and terms on most credit cards are better than those of a payday loan.
Ask your creditors for a break
If you do find yourself in a financial pinch that has you considering a payday loan, talk to your utilities and creditors first. Many times, you can put your electric and heat on a budget plan to help create cash flow and maybe the lender holding your car loan will let you skip a month so you can get tires.
Change your financial situation
When you find that you regularly don’t have enough money to pay everyday expenses like rent and groceries, you have to change your financial situation. That means bringing in more money or cutting expenses. You can bring in more money by working a side job (or two) or selling items that you have collected through the years and using the proceeds to pay off debts that have a monthly payment. If that is not an option, then cutting expenses is another choice. Create a budget, cook your own meals, pack lunch for work or school, stop buying the daily coffee, etc.
Speak to a debt counselor
One final consideration is to speak with a reputable debt counselor for help. Remember, this debt won’t last forever. It’s just your situation now. Once you gain control of your finances and build a healthy emergency savings you can splurge on some of the things you want. You’ll just do it more responsibly.
About Valerie Beaudin
Valerie Beaudin is the head of consumer and residential lending at VSECU. She has devoted her career to helping people understand and improve their financial situations and how to gain access to responsible financing that supports their needs and dreams. Valerie believes that doing good for the member is how we do good for the organization, our community, state, and the world. She lives with her husband in central Vermont, and enjoys disc golf, cheering on the Boston Bruins, reading, and time with her kids.