How to Avoid Being Taken Advantage of by Payday Loans
Payday advance lenders a risky way to get cash, CEO says
SAN MATEO, Calif., Aug. 8, 2007 - With the U.S. savings rate at zero, many Americans are living month to month, and many of them rely upon the 22,000 payday advance stores nationwide, which lend more than $40 billion in short-term credit each year. Payday lenders typically loan a few hundred dollars at a time, with an average interest fee of about $15 on a $100 advance. Most loans must be repaid within two weeks. "Borrowers often don't realize the real price they pay until it's too late. By then, the borrowing has become a vicious cycle. Payday loans can become a dangerous addiction - one that some have called 'financial crack,'" said Brad Stroh, co-founder and co-CEO of the free online consumer portal Bills.com. "Consumers can throw away hundreds or thousands of dollars a year on outrageous interest rates -- and the process can quickly get complicated." Where they are not strictly regulated, payday lenders can roll over loans again and again, resulting in exorbitant interest rates. The Federal Trade Commission points out that three rollovers could result in a cost of $60 for a $100 loan. Even where regulations apply, a person might borrow once, only to create a new cash-strapped situation before the next payday -- and nothing prohibits repeated borrowing. "Staying constantly behind could mean you give up more than half of your income to the payday lender -- for absolutely no return," said Stroh. He recommends the following three ways to defend against a last-minute loan:
- Plan spending. Create a budget that accounts for income and expenses. Devote some amount -- even if only a few dollars a week -- to saving for unexpected costs.
- Create an emergency fund. Set aside money not to be touched except in an emergency. Stroh suggests jump-starting the fund by brown-bagging lunch, avoiding extras like coffee or CDs, holding a yard sale or taking on a second job. Put the proceeds in a savings account that can't be drained accidentally. "It's not a good idea to keep a lot of cash around the house, but if your fund is in cash, keep it well hidden -- even from yourself," he said.
- Look into alternatives. Check into options such as establishing overdraft protection on a checking account. This service automatically covers a check or debit when there aren't enough funds in the account. The cost will be much lower than a payday loan.
For Americans in a bind with a surprise bill, Stroh suggests they consider these options:
- Borrow from a friend or relative. "If it's a matter of a few dollars to tide you over, ask for an IOU," said Stroh. However, he cautions, "An unpaid loan can destroy relationships, so don't use this option unless you know you can pay it back. Offer moderate interest or a favor in return."
- Talk to the creditor. Most medical providers will work with patients to pay the bill in a way they can afford. Don't hesitate to ask doctors or other professionals about making payment arrangements.
- Get help. If bills regularly outstrip your ability to pay, look into your options. "Check with a reputable debt resolution consultant to find a way to get your budget under control," Stroh said.
"We all run into financial straits once in a while. When you find yourself in a tight spot, don't make the problem even more stressful by strapping yourself with outrageous interest rates and increasing obligations," Stroh advised. "With careful planning, you can avoid the payday lender -- and find financial freedom." Based in San Mateo, Calif., Bills.com is a free one-stop online portal where consumers can educate themselves about complex personal finance issues and comparison shop for products and services including credit cards, debt relief assistance, insurance, mortgages and other loans. The company blogs about consumer finance issues at http://www.bills.com/. Since 2002, Bills.com and its partner company, Freedom Financial Network, have served more than 15,000 customers nationwide while managing more than $350 million in consumer debt. The company's co-founders and CEOs, Andrew Housser and Brad Stroh, were named Northern California finalists in Ernst & Young's 2006 Entrepreneur of the Year Awards.