Thinking of a payday loan? Stop, think again! Payday lenders use deception to avoid application of fair regulations declared last year by the Consumer Credit Commission. The agreement between payday lenders and a national bank may be little more than a mechanism to ensure that payday lenders avoid the application of state usury laws. Serious consumer protection concerns arise in this lending environment. Payday lenders are still responsible for the terms and conditions they impose on borrowers and must abide by the payday loan consumer protections set out in regulations (particularly the requirement that they move borrowers into a declining balance loan). Further, in March 2000, the Federal Reserve ruled that payday lenders are subject to the Truth in Lending Act and therefore must disclose in writing the annual interest rates they are charging. Compliance is mandatory. Lenders make small, short-term, and very high-interest-rate loans that go by a variety of names: 'payday loans,' 'cash advance loans,' 'check advance loans,' 'postdated check loans,' or 'deferred-deposit check loans.' Most often, you write a personal check payable to the lender for the amount you wish to borrow plus a fee. The check is post-dated for your next payday or another day within the next couple of weeks when you need to repay the loan. At that time, you usually have three options: let the lender deposit your check automatically, pay the lender in cash equal to the amount of the check, or roll over the loan and pay the fee again.
While payday lenders make it effortless to get the cash you need, try to avoid them. Their convenience comes at an extremely high price. The average fee for a payday loan is $20 to $25 per $100 borrowed and is due in full your next payday. To make matters worse, most lenders allow for the original loan to be rolled over to the next payday for an additional fee of $20 to $25 per $100 borrowed. When figured over a year, that's a 521.42% annual percentage rate (APR). Compare that to the 18% APR of the average credit card. A payday loan costs at least ten times as much as a small loan from a traditional bank. You may end up paying an APR of 300%, 400% or even 1,000%. If your check to the payday lender bounces, both the bank and your lender may charge you bounced check fees. In some states, a payday lender might threaten you with prosecution for writing a 'bad' check (even though the lender knew that you didn't have enough money in your account when it accepted your check). If you can't repay the loan and the fee on the due date, you may get ensnared in an endless cycle of debt: you are never able to pay off the loan, but you are repaying the loan fee over and over. Payday loan customers average more than 10 loans per year.
What are the choices for a person with no credit, bad credit and an unexpected bill? The situation leaves a few options. So here goes:
A big issue is the unexpected bill. You have no cash, bad credit or no credit card. You need money now or you need money soon. The wider the gap between when you need it and when you get it, the greater the pain and expense will be.
Ask your creditors for more time to pay your bills. Find out what they will charge for that service - as a late charge, an additional finance charge or a higher interest rate. Ask for more time to pay utility bills. One option might be to pay the expense in monthly installments. It is much easier to come up with an extra $50 per month than $500 at one time. Most businesses and individuals are willing to accept a monthly payment to be assured of payment. If they say no, consider paying a regular monthly payment anyway. Money is rarely returned. If you will be late with a payment or making an incomplete payment, call the creditor to let them know the circumstances and when they can expect full payment. Keep accurate written records of who you talked with, when and what the outcome was of the call. Ask if they have a hardship program. If you qualify, they may temporarily reduce your payment or interest rate.
What about a loan? For a large unexpected expense, check with your bank or credit union regarding a personal loan. They may turn you down, but try anyway. With bad credit you may pay a higher interest rate, but you will have a more-affordable monthly payment and avoid the worries and frustrations of paying back a payday loan with much higher interest rates. Borrow from a family member or friend. Be sure to put in writing the details of how you will repay the loan. Pay back the loan as quickly as possible and keep the lines of communication open. Loaning money can be a damaging thing for a relationship when the parties involved do not communicate if problems arise in paying back the loan. Find a friend or relative who is willing to co-sign a loan.
Many credit unions offer small, short-term loans to their members. State Employees' Credit Union "Salary Advance" loan program is an example. It offers an inexpensive alternative and financial counseling to help borrowers end their monthly borrowing cycle. Loans have a maximum ceiling of $500 with a current rate of 11.75% and no fees. Borrowers repay the loan via an automatic debit from their SECU account on their next payday. Many more consumers can join credit unions now that affiliation requirements are less strict.
When you need credit, shop for it with your eyes open. Learn the true cost of credit. Shop for the lowest cost credit available from cash advances on credit cards, small loans from a credit union or loans from a small loan company. Compare both the annual percentage rate and the finance charges of potential credit sources to get the lowest cost. Do not simply compare the payday loan fee with a bank bounced-check charge. Know the exact terms and the total cost to you, including interest before signing a loan document. Also, a local community-based organization may make small business loans to individuals.
To get money now, sell something of value such as jewelry, a computer, collectibles, a three wheeler, an antique or unused tools. Have a garage sale or try to put in overtime at work. Another option is a part-time job. Seasonal sales positions or service jobs such as lawn maintenance or house cleaning are some you might consider.
Most banks offer checking accounts with overdraft protection. Payday lenders claim their fees are lower than paying bounced check fees, but a better alternative is to prevent bounced check fees in the first place. For a small fee ($5) or no fee, banks will cover checks written by moving money from savings. Overdraft protection through a line of credit is also available at a 10-18% APR. If you are regularly using most or all of the funds in your account and you make a mistake in your checking (or savings) account ledger, overdraft protection can help protect you from further credit problems. Find out the terms of overdraft protection at your bank.

Spend less, starting today! This will free up cash the next time you are paid. Food is a large portion of most families' budgets and offers the most flexibility when it comes to reducing expenses. Cut out all eating out, clip coupons for items you use and stay away from high-ticket items like prepackaged foods and expensive cuts of meat. Entertainment expenses can be cut altogether in the short term. Get creative and look for free entertainment options. Rather than going to the movies, attend a free play at your community theater. Visit your community parks and hike and bike trails. Go to the library and get free books and videos. Longer-term options for decreasing expenses include decreasing utility costs by lowering or raising you thermostat, washing only full loads of clothes and dishes and turning out lights in rooms not in use. Cancel any club memberships, magazine subscriptions and other extras. Call about your student loan. Some student loans can be extended or consolidated.
Make a realistic budget and build a nest egg of savings to avoid the need to borrow small sums to meet emergencies and unexpected expenses. Just $300 in a savings account would save payday loan borrowers those steep fees. Figure your monthly and daily expenditures. Avoid unnecessary purchases, even small daily items. They add up! Live within your means. This may require drastic spending cuts when you first begin, but it is essential. Without a spending plan, you will have no idea where your money goes. Write down a budget or create one on your computer. Most importantly, look at it, believe it and follow it!
There are various consumer credit counseling agencies throughout the state that can help consumers work out a debt repayment plan with creditors or develop a budget. Be sure to work with a non-profit, nationally accredited agency affiliated with the National Foundation for Credit Counseling. There are non-profit groups in every state that offer credit guidance to consumers. Also, check with your employer, credit union or housing authority for no- or low-cost credit counseling programs. Many states have Social Services' Crisis Intervention Programs (CIP). Check with your church on faith-based emergency assistance programs. Some employers grant paycheck advances to employees. Because this is a true advance, and not a loan, it is a much better alternative than a payday loan. If you have a 401K at work, some companies allow you to take out a loan against it and the interest you pay back is actually interest you pay to yourself.
Finally, there is always the option of doing nothing. If there is no money you can earn, no expenses you can cut and no money to borrow (other than a payday loan), you can just explain the situation to your creditor, pay what you can, do your best to save and take more lumps on your credit. If you are taken to court for a judgment, you will have something to illustrate your efforts to repay and why you should be given a lower payment than the creditor is demanding.
Build some savings, even small deposits can help. For example, by putting the amount of the fee that would be paid on a typical $300 payday loan in a savings account for six months, you would have extra dollars available. This can give you a buffer against financial emergencies that cause immediate financial hardships. Save for emergencies. The nature of emergencies is that they are unforeseen. The best assurance you can give yourself that you will not have to resort to a payday loan in the future is to put aside a savings cushion of three to six months of expenses for any financial emergency that may arise. If three months seems impossible, try for a week. Then grow it to two. Having any savings makes a world of difference from having none. So get busy and save something, no matter how little, and make rebuilding your credit over the next two years a priority.
Of the options available to you, the one that will do you the least good is applying for a payday loan! You will become one of the many consumers who, without a plan, fall into the trap of borrowing from a payday lender to ease an immediate cash flow problem. The trouble with this is the immediate fix is very costly. Let's do the math. You are $300 short of making your car payment and do not want to miss the payment. To solve the shortage problem you take out a loan for $300 from a payday lender. OK, the car payment has been made. It is now payday and instead of depositing the usual amount of pay you will be $360 short. The two-week payday loan has cost you $60 in fees or a comparable annual percentage rate of 521.42 percent. As a comparison, if you were to get a cash advance from a credit card for $300 to make your car payment, you would pay an average APR of 21 percent and a transaction fee of perhaps 3 percent. Paying off the advance when you receive your next statement would cost you $314.25. The $45.75 difference is not a huge amount, but it can make a dent in an already tight budget. The cost or fee of the payday loan is more than four times as much as the credit card advance is. In terms of interest charges, 21 percent is outrageous, but 521.42 percent makes my head hurt!
Consumers who take out payday loans often find themselves needing additional payday loans to pay off existing loans. The original loan can start a vicious cycle of borrowing from future earnings to pay today's bills. How do you break the cycle? In simple terms, the only way to stay out of financial trouble is to spend less than you earn. Although it may not be easy, it can be done. If payday loans are the only alternative, borrow only an amount that is affordable, enough that can be paid with the next paycheck and still have money left to live on for the next few weeks.
A final option: Stop borrowing. If you don't know how you will be able to pay it back, don't do it. It's not difficult to sympathize with the single mother who must buy medicine for her sick child. How about the father of a large family whose car just broke down for the fourth time? Desperate situations call for desperate action. The key is changing one's condition rather than existing from paycheck to paycheck. Everyone's situation is not the same.
It's a tough world out there when you have no positive cash flow and bad credit, too. Sometimes the only way out is to take responsibility for your situation, whether or not it is your fault, and just work through it as best you can. I believe that if you work at it, you will find a solution. Please remember that payday loans, cash til payday advances, and military loans are not a good solution to temporary financial hardships.