Payday Loans Hitting The Consumer Hard

With today's hurdles and difficulties in life, the financial status meter of most people reads negative. This is because of the competing life necessities (expenses) compared to the salaries most people are getting.

I was really thinking... You know those lenders who came up with payday loans had a point! They cared to make people realize that help is really needed. So some lending institutions came up with small short-term loans that you pay back when you get paid (your payday) or according to the agreement. Well somehow this helped a little to support the one that desperately needs the money, but what then happened?

The same small loans are coming back to the consumer with huge debts and hitting them so hard that they end up paying even triple of what they borrowed. The payday loans pile up and although one may not feel it, they may become real big debts for the consumer without realizing it.

Consumers Union defines a "payday" loan as, "Small, short-term loans made by check cashers or similar businesses at extremely high interest rates. Typically, a borrower writes a personal check for $100-$300, plus a fee, payable to the lender. The lender agrees hold onto the check until the borrower's next payday, usually one week to one month later, only then will the check be deposited. In return, the borrower gets cash immediately."1

Once you borrow and the loan temporarily solved your problem, the payday loan becomes a solution for you. Every time there is a need for quick, urgent fast cash money, there you go, you rush to a payday shop and you get yourself one. The more you take the more you add to the debt you are in. It's better to have credit card debt than a payday loan! The interest for a payday loan is too high. As stated in a 2006 Market Watch "Payday for Lenders" article, "To pay back a $325 loan, the average payday-loan borrower pays a total of $793. The average annual interest rate on such loans runs about 400". The Lenders in the payday industry earn as much as $4.2 billion annually in fees².

As listed on the Consumer Union website, alternatives to payday lenders for consumers facing debt problems include:

1. Negotiate a payment plan with creditors. The best alternative to payday loans is for consumers is to deal directly with their debt. Most creditors will accept partial payments if one sets up a payment plan. Consumers can negotiate such plans themselves or contact the local nonprofit Consumer Credit Counseling Services (CCCS) office for help. Paying off debts through a payment plan, rather than taking on even more debt at exorbitant interest rates, is the best way to deal with financial problems. CCCS offices also teach money management skills to help consumers prevent financial problems in the first place.

2. Credit cards/Secured credit cards. Some credit card companies specialize in consumers with financial problems or poor credit histories. Consumers should shop around and not assume they do not qualify for a credit card. Secured credit cards are another option. A secured card is basically a credit card tied to a savings account ($500 for example). The card's credit line is the amount deposited in the savings account. The funds of the account "secure" the amounts charged on the card. Once a consumer has successfully used the secured card for 6 months - 1 year, they can then qualify for a regular unsecured credit card.

3. Advances from employers. Many employers will grant paycheck advances to employees. Because this is a true advance, and not a loan, it obviously is a better alternative than payday lenders.

4. Credit unions. Credit unions offer small, short-term loans to their members. Many more consumers can join credit unions now that affiliation requirements are less strict.

5. Overdraft protection. 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.

6. Lines of credit from finance lenders. Finance lenders such as Household offer small lines of credit to consumers with less than perfect credit histories. These credit lines range from $2,000-$5,000 with interest rates from 25-35% APR.

All be cautious!

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By: Poly Muthumbi's and Keith Canady

¹ ConsumersUnion.org, Fact Sheet On Payday Loans

² MarketWatch.com, Payday for Lenders, 11/30/06

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