- Take out a payday loan as a last resort.
- Limit the amount you borrow as best you can.
- Don't fall behind on repayment, or the high interest can make it difficult to catch up.
National Payday Loans
Payday lending is a booming industry. In the past few years, it has become much more difficult to obtain an unsecured loan. Even if you have equity in a home, borrowing from your equity is far harder than it used to be. In most cases, lenders have tightened the requirements for loan qualification, limiting the number of eligible borrowers. For instance, most lenders require borrowers to have an excellent credit rating. Payday lenders, on the other hand, certainly do not require a borrower to have good credit.
Payday loans come with VERY high interest rates. Payday loans are costly and are often targeted at less sophisticated consumers. Some states have banned payday loans entirely. In the states that allow payday loans, with the rough economy, demand for payday loans remains strong.
Payday loans are designed to be a short term solution. The borrower usually commits to repaying the loan in full with the proceeds of his or her next paycheck. Unfortunately, many borrowers do not pay back the payday loan as agreed, which exposes him or her to huge financial penalties. It is not uncommon for delinquent payday loans to accrue interest and penalties that are greater than 1,000% annual interest!
The main reasons that consumers take out payday loans are convenience and lack of other options. Payday loans are convenient as they do not require a credit check and are easy to apply for; all that a customer needs is proof of income and a checking account. Often, payday loan borrowers were not able to find anyone else to lend them money, making the payday loan the only available option. This can lead borrowers to selecting a payday loan when it is not a good choice, because it seems that there are no other choices available.
It is hard to criticize someone who borrows money, with the intention of paying it back, in order to pay a bill that may result in repossession or a serious problem if the bill is not paid. The problems with payday loans arise when the debt is not repaid as agreed. Then, the high interest rate often makes it impossible for the borrower to catch up. Instead, the debt grows and grows, sometimes causing the borrower to collapse financially.
Payday Loan Alternatives
Before taking out a payday loan, the United States Federal Trade Commission suggests that you should examine every other available alternative, such as:
1. Consider a small loan from your credit union or a small loan company. Some banks may offer short-term loans for small amounts at competitive rates. A local community-based organization may make small business loans to people. A cash advance on a credit card also may be possible, but it may have a higher interest rate than other sources of funds: find out the terms before you decide. In any case, shop first and compare all available offers.
2. Shop for the credit offer with the lowest cost. Compare the APR and the finance charge, which includes loan fees, interest and other credit costs. You are looking for the lowest APR. Military personnel have special protections against super-high fees or rates, and all consumers in some states and the District of Columbia have some protections dealing with limits on rates. Even with these protections, payday loans can be expensive, particularly if you roll-over the loan and are responsible for paying additional fees. Other credit offers may come with lower rates and costs.
3. Contact your creditors or loan servicer as quickly as possible if you are having trouble with your payments, and ask for more time. Many may be willing to work with consumers who they believe are acting in good faith. They may offer an extension on your bills; make sure to find out what the charges would be for that service — a late charge, an additional finance charge, or a higher interest rate.
4. Contact your local consumer credit counseling service if you need help working out a debt repayment plan with creditors or developing a budget. Non-profit groups in every state offer credit guidance to consumers for no or low cost. You may want to check with your employer, credit union, or housing authority for no- or low-cost credit counseling programs, too.
5. Make a realistic budget, including your monthly and daily expenditures, and plan, plan, plan. Try to avoid unnecessary purchases: the costs of small, every-day items like a cup of coffee add up. At the same time, try to build some savings: small deposits do help. A savings plan — however modest — can help you avoid borrowing for emergencies. Saving the fee on a $300 payday loan for six months, for example, can help you create a buffer against financial emergencies.
6. Find out if you have — or if your bank will offer you — overdraft protection on your checking account. If you are using most or all the funds in your account regularly and you make a mistake in your account records, overdraft protection can help protect you from further credit problems. Find out the terms of the overdraft protection available to you — both what it costs and what it covers. Some banks offer "bounce protection," which may cover individual overdrafts from checks or electronic withdrawals, generally for a fee. It can be costly, and may not guarantee that the bank automatically will pay the overdraft.
The bottom line on payday loans: Avoid them if you have any other alternative. If you must take out a payday loan, try to borrow as little as possible. Borrow only as much as you can afford to pay with your next paycheck — and still have enough to make it to next payday.