Understanding the Risks of Payday Loans

For millions of people who are short on money, payday loans can be tempting. And why not? Even though getting a payday loan is easy and the application process is a breeze for most people, it might not be the right deal for you. The average borrower typically does not understand finance to any great depth, struggles with debt and/or has a hard time dealing with their everyday financial obligations. What they don't know is getting one of these loans can actually worsen their burden financially. The Federal Trade Commission has a great article on how payday loans are costly and should be avoided.

Beware of Risks from Internet Payday Lending

Using the internet to borrow money carries risk. Not only will you have to pay the high cost for a payday loan and deal with the short repayment time, borrowing money online also adds privacy and security concerns. Contracts are signed electronically they are legally binding, in some cases all you have to do is click "OK".

You will be sending personal identification information, your Social Security number, and your bank account information to the lender. If the websites are unsecured, your security and privacy could be at risk. Always make sure the URL shows https:// before submitting any part of the application.

Never apply for a loan you will not be able to repay. What happens if you don't repay the loan? The implications are disastrous and lenders will take legal action. Your credit score can be negatively impacted too as this could make borrowing money in the future more costly.

The Federal Trade Commission (FTC) released a press release on risks and is available at Payday Loans Equal Very Costly Cash: Consumers Urged to Consider the Alternatives.

Try To Budget, Avoid Quick Cash

One way to avoid needing quick cash is to build an emergency fund of $500. Even if your household budget is tight, an emergency fund is necessary to deal with the ups and downs of life, including unexpected bills and emergencies. Start small, saving just $10 per paycheck. If you have an electronic deposit set up with your employer, ask if you can have a portion of that money deposited into your savings account. You can also visit www.AmericaSaves.org to find ways to save money. You can always use your emergency savings instead of borrowing, but you must remember to repay yourself like you would a creditor.

Creating a household budget is a good tool to help you find ways to save and track how you are spending your income. Write down all your income and expenses. Create a workable spending and savings plan with each member of your family. Be sure to set aside money from each paycheck to deal with those bills that come due at regular intervals, such as once or twice a year. Also, plan ahead for those special expenses, such as holidays and vacations.

Seek Help from Credit Counselors

Consumers who are in financial distress can get help from credit counseling. These agencies have traditionally offered a variety of services and products, including things like community education, budget counseling, and financial advice. They also offer debt management plans, known as DMPs, but consumers should be aware that the credit counseling industry is not perfect. There have been some serious problems with some of these agencies, including poor advice, unnecessary fees, and even using deceit to gain customers.

Be aware that not everyone can benefit. You should evaluate all choices you have to resolve your financial difficulty before you enter a credit counseling program. You can always work to develop a better budget and savings plan yourself, or even negotiate with your creditors on your own. If your situation is serious, declaring bankruptcy is an option to consider.

If you do decide to use a credit counseling agency, take the time to shop around for one. Many companies who advertise on television or online are not actually credit counseling companies. They are actually companies known as credit repair companies. If you work with them, you will find that you are charged high fees for things that you could be doing yourself without any help. Talk to your friends and family members to get referrals. Also, check with the Better Business Bureau or your state's Attorney General's office to learn which of these agencies have any complaints filed against them. You can begin your search through the National Foundation for Credit Counseling, but be sure to take the time to look at many different agencies in depth before you choose one to work with.

Try Not to Borrow and Cope

If you are about to be late with a rent, utility, or mortgage payment, take some time to talk to the creditor. If the bill does not carry interest, ask if you can make a payment arrangement. You might be able to delay the payment until your next paycheck arrives. You also may be able to set up a repayment schedule that allows you to stretch out your payments over time. Before agreeing to this, though, ask if there are any fees or extra costs for the service. Remember that getting behind on your payments on your bills could cause your credit rating to drop.

Do not purchase expensive items until you have the cash available to do so. Even if it is a car repair that you need to have done, you can often put that off a few months by taking public transportation. You can also look into a carpool arrangement with other co-workers who live near you. This gives you the chance to collect the cash you need for the car repair.

There are also local charity and community programs designed to help families who cannot make ends meet. Take advantage of these. Also, you can sometimes apply for assistance programs for certain bills, such as your utility bills.

Research Other Alternatives

Talk to friends or family members to ask them if you can borrow money. Be sure to have a written agreement about the repayment terms to avoid any family problems later on.

If you have a bank, apply for a line of credit or a small loan with that financial institution. If you have a credit union membership, you should know that credit unions often offer small loans to their members, even though they do not advertise this fact. Keep a credit card on hand with a low limit to use for emergencies. However, only use that credit card for true emergencies, and pay it off as soon as you possibly can.

Also, take the time to comparison shop so you can find the least expensive credit possible. Before you sign any contract committing you to a debt, make sure it is the best option. Don't forget to compare both the APR (annual percentage rate) and the finance charge in dollars and cents. It is a federal law that all lenders or other sources of credit, except those providing bank overdraft loans, must disclose their credit costs in the same manner so you can compare costs.

If you can, take on extra hours or work to earn more income. Overtime pay is a great way to add to your income. If you own something valuable that you no longer need, sell it to allow you to pay your bills.

Another option is to adjust your withholdings on your check so you have more money in your paycheck each week instead of getting a big tax refund at the end of the year. However, do not withhold too little, because that will cause you to owe taxes in the spring. If you can get an Earned Income Tax Credit, find out if you can get that credit paid in each check instead of at the end of the year at tax time.

Do Not Get Trapped

Stay away from the trap created by piling up payday loan after payday loan. If you have to take out a second payday loan to pay back your first one, you will create a huge debt trap that is difficult to get out of.

If you cannot pay back your loan at the due date, tell the lender that you need to make a repayment arrangement that will allow you to pay back the loan in monthly installments. Most lenders allow this but some states do not so you must check your state regulator's website. They can also help if you do not get a positive response from a lender.

Beware of Bounced Check Fees

Both the bank and the payday lender will charge a fee if your check bounces. Every time a check is returned by your bank unpaid, you are charged another fee by the bank. The bank fee usually ranges between $20 and $35. The payday loan company will also charge you if your check is returned by the bank.

When paper checks bounce, the lender can convert them into an electronic re-presentment. The self-regulatory rules that all banks must follow limit the amount of times that an electronic check can be presented for payment after it has been sent back. The lender should not try to return the check more than three times. However, that still means that you will be paying the fees charged by the bank and the lender three times if the payday loan check overdraws your account. If you see that the lender has sent the check in more than three times, you can file a complaint with your bank.

Even payday loans that are handled electronically can "bounce". Also, the agreements you sign for an online payday loan may allow the lender to break the payment into several different attempts to get the money from your bank account. Each time the lender tries to get the money electronically, you can earn NSF fees if you do not have the money in your account. The loan agreement may require you to keep your bank account open until all fees and payments have been collected by the lender.