1. Triple digit interest rate
The cost of a payday loan can be 400% APR (annual interest rate) and higher.
2. Short minimum loan term
75% of payday customers are unable to repay their loan within two weeks and
are forced to get a loan "rollover" at additional cost. In contrast,
small consumer loans have longer terms.
3. Single balloon payment
Unlike most consumer debt, payday loans do not allow for partial installment
payments to be made during the loan term. You must pay the entire loan back
at the end of two weeks.
4. Loan flipping (extensions, rollovers or back to back transactions)
Payday lenders earn most of their profits by making multiple loans to cash-strapped
borrowers. 90% of the payday industry's revenue growth comes from making more
and larger loans to the same customers.
5. Simultaneous borrowing from multiple lenders
Trapped on the "debt treadmill,” many consumers get a loan from
one payday lender to repay another. The result: no additional cash, just more
renewal fees.
6. No consideration of borrower's ability to repay
Payday lenders may try to get you to borrow the maximum allowed, regardless
of your credit history. Then if you can't repay the loan, the lender collects
multiple renewal fees.
7. Deferred check mechanism
If you cannot make good on a deferred (post-dated) check covering a payday
loan, you may be assessed multiple late fees and check charges or fear criminal
prosecution for writing a "bad check."
8. Mandatory arbitration clause
By eliminating your right to sue for abusive lending practices, these clauses
work to the benefit of payday lenders.
9. No restrictions on out-of-state banks
Federal banking laws were not enacted, so out-of-state payday lenders will
try to circumvent state laws.
But how can you avoid payday lenders when the rent is overdue and you have
creditors knocking at your door?
Here are some possible alternatives:
- A payment plan with creditors
- Advances from employers
- Credit counseling
- Government assistance programs
- Overdraft protection at a bank or credit union
- Credit union loans
- Cash advances on credit cards
- Military loans
- Small consumer loans
Payment Plan with Creditors
The best alternative is to deal directly with your debt. Even if you already
have a payment plan, many creditors will negotiate regular partial payments.
This will allow you to pay off bills over a longer period of time.
Advances from Employers
Some employers grant paycheck advances. Because this is a true advance, and
not a loan, there is no interest. So this is much cheaper than a payday loan.
Consumer Credit Counseling
A consumer credit counseling agency can help you to work out a debt repayment
plan or develop a budget. These services are available at little or no cost.
Contact a nationally accredited consumer counseling agency in your area by
calling 1-800-388-2227 or visiting their
online locater.
Government Assistance Programs
Many households are leaving money on the table. Are you claiming benefits
through MaineCare, the Earned Income Tax Credit, the Maine Rent and Tax Refund
Program, and other programs intended to help people with limited incomes who
are struggling to pay their basic bills? Go to: Don’t
Leave Money on the Table. This will help you to do a check up, to make
sure you are getting all of the income you could be getting.
Overdraft Protection
Payday lenders claim their fees are lower than paying bounced check fees.
A better alternative to getting a payday loan is to prevent bounced check
fees in the first place. Most banks offer checking accounts with overdraft
protection. For a small fee ($5) or no fee, banks will cover a check by moving
money from a savings account.
Overdraft protection through a line of credit is also available, typically
at 10 to 18% APR (annual interest rate).
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NOTE: While traditional overdraft protection (described above) may be a good
alternative, fee-based “bounce protection” programs usually are
not. This type of “bounce protection” means that the bank is making
a loan to cover the check. Bounce protection programs charge fees - from
$20 to $35 per transaction and/or $3 to $10 per day - in exchange for covering
account overdrafts up to a set dollar limit (usually $100-$500). Through a
loophole in Federal Reserve rules, institutions with bounce protection programs
don't disclose how expensive these fees can be, charging up to 1,000% APR.
Don’t fall for this scheme!
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Credit Union Loans
Many credit unions offer small, short-term loans to their members. For example,
one North Carolina credit union offers members a salary advance loan at 11.75%
annual interest—30 times cheaper than a typical payday loan. Some credit
unions also offer free financial counseling and a savings plan to help members
get back on their feet. Many other credit unions offer very low interest rate
loans (prime to 18% annual interest) with quick approval on an emergency basis.
Unlike payday loans, these loans give you a real chance to repay with longer
payback periods and installment payments. Find a credit union in
your area.
Cash Advances on Credit Cards
Credit card cash advances, which are offered at about 30% APR, are much cheaper
than getting a payday loan. Some credit card companies specialize in consumers
with financial problems or poor credit histories. Shop around and don’t
assume that you can’t qualify for a credit card. Secured credit cards
are another option. A secured credit card is tied to a savings account. The
funds on the account 'secure' the amounts charged on the card. Once you have
successfully used the secured card for a period of time, you can then qualify
for a regular unsecured credit card. People can get into lots of trouble with
credit cards, but this may provide a cheaper alternative to a payday loan.
Military Loans
Several companies offer loans ranging from $500 to $10,000 to active duty
and retired military personnel. Payday loans are 10 to 13 times more expensive
than these small consumer loans. These loans cost less than payday loans because
they have much lower APR, ranging from 33% to 34.99%.
Small Consumer Loans
Small consumer finance companies offer small, short-term loans that cost up
to 60% APR, usually in the range of 25-36% APR. These loans are also much
cheaper than payday loans; a person can borrow $1000 from a finance company
for a year, and pay less than a $200 or $300 payday loan over the same period.
