How To Avoid The Payday Loan Trap
Payday Loans Can Help Cover Short Term Expenses, But Avoid The Trap of Payday Lending Over The Long Term
Steps to take when considering a payday or cash advance loan
Avoiding payday loans in the first place is your best bet to keep from getting yourself in a deep debt hole that's very, very hard to climb out of. It's been reported that 5 million Americans have been caught in the trap of payday lending, according to Responsiblelending.org.
According to their website, a postdated personal check or an authorization for automatic withdrawal from the borrower’s bank account is given by the borrower. In return, they get a $300 payday loan.
However, the lender only gives a borrower $255 in cash, and the balance of $45 is the fee for the loan. Any way you look at it, that's a huge interest rate.
But if often gets worse. When the payday loan comes due, the lender often has to pay more fees or renew the loan just to keep from going into default.
To avoid default, borrowers might be forced to pay another $45 to keep the same loan outstanding, or they agree to pay the full $300 back, but then immediately take out another payday loan, with another $45 fee.
Bottomline: some borrowers pay $45 every two weeks to float a $255 advance loan – while never paying down the original amount of the principal.
Payday lenders argue that they are making high risk loans and serve a market that is ignored by traditional banks and lending institutions. Many people they serve have bad credit which prevents them from getting a small, short-term loan to tide them over until their finances improve.
But payday lenders are coming under increasing criticism and regulation across the country.
This article and related warnings from this organization is found at: Payday/DebtTrap on their website. They've also published timely warnings titled "Nine Signs of a Predatory Payday Loan." Their article can be found at: the Responsiblelending.org website.
We empathize with people who are in dire straits and who are forced to turn to payday lenders to help them pay bills. Our hope is that people who fall into this trap can take advantage of the free information we've posted here to get debt relief, get out of debt, fix their credit report and start the steps toward improving their credit history.
If you feel that you or someone you know has been taken advantage by a payday lender, you can ask for assistance here.
In January 2008, the Community Financial Services Association (CFSA) rolled out a new consumer website called www.knowyourfee.org, in an effort to help borrowers know the fees they will be charged taking out payday cash advance loans, and also, to help stem the PR nightmare that payday lenders have struggled to deal with.
Their fight is justified, because there really are times when payday cash advance loans can help a person out in tough financial times. Should they be used in all circumstances? Absolutely not. But sometimes, cash advance loans might be the only options available.
Some of the benefits of payday cash advance loans are detailed in the article below:
When budgets are tight and you're short of cash towards the end of the month, a payday loan can seem like the ideal answer, giving you enough money to see you through until you receive your next wage. Unfortunately, this can be too simplistic a view, and using payday loan facilities to paper over the cracks of a bad financial situation can make matters even worse, given the relatively high fees involved in short term, small dollar loans.
The fact that a typical payday loan will cost around 25% of the amount borrowed in fees, repayable within a period of a month or so of receiving the advance, means that in APR terms the cost can be astronomical even though the actual dollar amount may seem small. This means that potential borrowers need to think carefully about whether they really need a loan, as there are alternatives that may be a better option.
The major danger with payday loans is the temptation to use them to cover bills and allow a certain amount of living beyond your means. It's easy to fall into the trap of having to take out a new loan every month to make ends meet, all the time paying the high fees. Once in the trap, it's very difficult to escape without a dramatic change in circumstances. So what are the alternatives?
If the main reason you need a loan is to cover a credit card payment or other bill, you may be able to contact your creditor and arrange a repayment program that gives you enough breathing space to avoid the need for a loan. Even if you can't come to an arrangement, the bald fact is that delaying a payment will mean being charged a late fee only once, rather than the monthly fees incurred by the payday loan trap. Of course, it's rarely advisable to break a credit agreement, and your credit rating will certainly be damaged, but as a last resort it's an option to consider.
A more financially responsible way out of the trap is to look for a credit union in your area. These non-profit organisations will advance funds at an extremely low rate, and also offer advice and help to get your finances back in shape. In the longer term, they can also offer flexible savings plans to help you build up a 'rainy day' fund for the future.
You can also make use of a credit card cash advance facility, which although expensive, allows you to spread the cost over a number of months and will end up being less costly than a few months of payday fees. Debt consolidation or small consumer loans can be a cheaper alternative, but are best used as part of a complete overhaul of your finances and budgeting.
So are payday loans altogether bad news? Not entirely. In a genuine financial emergency they can be a lifeline, and so long as they're not renewed then they can actually be less expensive overall than taking out credit at a cheaper rate but over a longer period. Just make sure you don't fall into the trap of having to take out a new loan every month to cover basic living expenses.
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