Alternatives to Payday Loans
Payday loans can look like a good deal. But they aren’t. Here is what payday loans looks like, why you should avoid them, and some possible alternatives.
Nine Signs of an Predatory Payday Loan
Learn more about Payday Loans from The Center for Responsible Lending and the Federal Trade Commission's info. about online payday loan schemes. This September 2014 FTC Press Release reveals the depth of the problem. Be careful! Don't give out access to your bank account.
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.
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).
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!
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.
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.
Updated December 2005; partially updated September 2014