|By Wendy Clay on October 18, 2011
Payday loans are defined by the Federal Trade Commission as “cash advance[s] secured by a personal check or paid by electronic transfer.” Although payday loans seem like a quick way to get cash when in a pinch, further inspection reveals that they are actually immensely cost ineffective due to the hefty borrowing fees they carry.
Depending upon how they are charged, these fees can wind up costing you 15% or more than the amount you borrow and even result in massive amounts of debts. Fees are often levied in two main ways: as a percentage of the borrowing amount or as a specific amount per $50 or $100 borrowed. (When collected the latter way, the average fee is $15-$30 per $100 borrowed).
Although the initial fees are tremendously higher than other means of credit (i.e. credit cards), the real problems associated with payday loans arise when you can’t pay back what you’ve borrowed, a problem that 99% of all first time payday loan borrowers face. Each time you fail to repay your loan amount and the initial borrowing fees, payday loan companies tack on additional fees which are normally the same amount as the initial borrowing fee.
The combined fees for taking out a payday loan and rolling over just once can bring the annual percentage rate,(APR) which refers to the cost of the loan on a yearly basis, within 400%-800% of the original loan value. It’s obvious that the easiest way to avoid payday loan debt is to avoid taking out a payday loan, but what other credit options are out there, and what should you do if you already find yourself mired in debt?
Some alternatives to payday loans include:
If you have already taken out payday loans and find yourself accumulating debt due to an inability to repay them, here are some tips that can help eliminate your debt:
- Taking out a small loan from a credit union or small loan company.
- Analyzing spending habits to cut out excessive spending and creating a budget to utilize income more efficiently. (This is extremely important if you find yourself constantly living paycheck to paycheck).
- Finding a second job or working overtime to bring in more money.
- Lowering the amount of money withheld from your income for taxes each pay period and thus increasing your paycheck.
- Getting overdraft protection on your checking account. (The fees associated with overdrawing your checking account when you have overdraft protection are much lower than those of payday loans).
- Applying for a cash advance on your credit card. (This is the least preferred method out of these six options).
Again, the best way to prevent payday loan debt is to avoid payday loans altogether, but if you find yourself piling up debt, act quickly to lessen your debt through the tips above.
- Try to contact your creditors or loan servicer to acquire more time to make payments. When you do so, be sure to inquire about additional charges you should expect such as late charges, added finance charges, or higher interest.
- Contact a local consumer credit counseling service to help you devise a debt repayment plan with your creditors. A great place to start searching for such services is with your employer, housing authorities, or local credit unions.
- Try to consolidate your debt so that you will have fewer monthly payments to make to fewer creditors, lower interest rates, and fewer late fees. Doing so can also decrease the amount of time spent trying to get out of debt.
- Draft a budget and put aside any extra money to pay off debt.
“Avoiding the Payday Lending Trap.” andrewsfcu.org. Andrews Federal Credit Union, n.d. Web. 20 Sept. 2011.
“Getting Rid of Payday Loan Debt.” DebtConsolidation.com. Debt Consolidation, n.d. Web. 20 Sept. 2011.
“Payday Loans Equal Very Costly Cash: Consumers Urged to Consider Alternatives.” ftc.gov. Federal Trade Commission, March 2008. Web. 20 Sept. 2011