Everybody finds themselves short of cash now and then, and it can be difficult to think of ways to raise enough money to get through a rough patch.
This is when many people turn to payday loans, the modern-day equivalent of borrowing from your local mobster. Both are bad ideas, since the loans are very expensive – 400% annual interest is not unusual – and will end up costing you many times the original amount you borrowed.
In the old days, if you didn't pay back the loan from your local mobster, bookie or whoever, you could get your legs broken. Today, it can be even worse – you can wind up hopelessly in debt, with a ruined credit score and possibly a long line of former friends and family members who are disappointed with you.
The U.S. Consumer Financial Protection Bureau has found that more than 80% of payday loans are re-borrowed within a month, effectively trapping consumers in a cycle of debt. Consumers can wind up in debt literally forever, simply borrowing more and more money to pay off existing balances which continue to grow as exorbitant interest rates are added on.
Payday lenders get around the law
Consumer advocates are constantly trying to outlaw payday loans and have had some successes. But the problem is that there's always a way around the law, aided by those most corrosive of entities – the internet and Congress. Many payday lenders are outside the United States and pretty much beyond the long arm of the law. And Congress is in thrall to lobbyists who come up with loopholes that help their clients get around pro-consumer state laws.
So what can you do if you have an unexpected emergency expense, like an illness in your family, major auto repairs or sudden job loss?
The obvious answer is to keep an emergency fund for just such occasions but for those who are barely making it from one payday to the next, that's easier said than done.
There are alternatives to a payday loan, however, and it is definitely worthwhile pursuing them.
Avoiding payday loans
Here are a few last-ditch efforts that could keep you away from the predatory payday lenders.
- Ask your family or a trusted friend for help. It can be hard to borrow money, but it can be worth it to avoid an expensive loan. If you find someone willing to help, be sure to sign a note that obligates you to repay the loan with interest. Be sure to live up to that agreement.
- Ask the companies you owe money to if you can have more time to repay them. This is very common and happens every day. Companies usually welcome it and will work with you. They would rather get paid a little bit late than not at all. Be ready to pay something upfront as a sign of good faith and to pay interest or a service fee.
- Ask your employer for a paycheck advance. If you do this, do it during normal business hours and don't press for an instanteous payment. Businesses have cash flow needs too. And your boss doesn't want you calling him at 7 p.m. Friday to ask for money.
- Try to get a loan from a bank or credit union. If you don't belong to a credit union, you should. They're non-profit and are the best source of low-cost checking accounts, loans and mortgages. If you get a bank or credit union loan and pay it off on time, you will not only get out of your sticky situation, you'll also be helping your credit score.
If all else fails and you do get a payday loan:
- Pay it on time. Make sure you know the payment deadlines.
- Read the loan agreement carefully. Read it yourself, don't rely on what someone tells you. If you don't understand it, ask for help from someone who is familiar with legal and financial matters. Contracts mean what they say; verbal promises mean nothing.
- Consider getting some professional advice on your personal finances and household budget. Look for a non-profit credit advisory firm, preferably one associated with your local government, union, church or other reputable organizations. Many commercial credit advisors are shady, sad to say.
The Consumer Financial Protection Bureau has extensive information about payday loans on its website. This article just scratches the surfaces. If you're considering a payday loan, check the CFPB site and take careful not of what you find there.
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