NEW YORK (MainStreet) — When your rent is due and your bank account is empty, it can get scary. But turning to a payday lender to satisfy your landlord or other creditor is scarier. Internet and storefront payday lenders collect more than $7 billion in interest and fees on $40 billion in loans each year, according to the Consumer Federation of America. But rather than solving financial woes, these high-cost quickie loans actually create them, according to research showing consumers who take out payday loans have more trouble paying mortgage, rent and utilities than those who don’t.
Experts, naturally, advise payday borrowers to think ahead, cut costs, boost income and build up a rainy day savings account. But if rain rolls in and you still can’t pay essential bills, then what?
“The good news is there are a lot of alternatives to payday loans that are immensely better,” says Joe Ridout, a spokesman with Consumer Action, a San Francisco-based consumer advocacy group. To understand why, consider what makes payday loans so bad for you.
Stratospheric costs are the main issue. Interest and fees vary by state but, in California, they equate to an annual percentage rate of 459%, Ridout says. Some states don’t even allow payday loans, considering them predatory lenders, while others allow even higher charges. In Texas, according to Anne Baddour, director of the fair financial services program for Austin-based advocacy group Texas Appleseed, lenders charged an average APR of 600% for a typical single payment 14-day payday loan in 2013.
Another problem is that terms requiring repayment in a week or two in a single balloon payment causes borrowers to renew loans repeatedly, racking up more fees and falling further into financial trouble. So any loan that lacks these features is probably better.
Your best alternative may as close as your hip pocket or purse. Cash advances on credit cards are far less costly than payday loans, averaging about 30% annual interest rate. If anything, they are more convenient than payday loans, since you can tap your credit balance at an ATM or by writing a check. “It’s a bargain,” Ridout says. “If you have a credit card with some limit, taking a cash advance is more than ten times cheaper than a payday loan.”
You may be able to save on interest altogether if your employer has any faith in you. “To get a payday loan, you have to have a job and paycheck,” Ridout notes. “Why not talk to your boss and ask for an advance on your paycheck?” The beauty of a pay advance is that there are no fees, interest charges or balloon payments. The downside, of course, is that your next paycheck will be smaller.
Friends and family offer another potentially no- or low-interest source of emergency funds. “To borrow from family and friends is embarrassing, but wouldn’t be as expensive as a payday lender,” Ridout says. Don’t forget, however, that friends and family loans are based on affection and respect. If you can’t pay them back, it can damage lifelong relationships.
If you have a decent relationship with creditors, ask them for help. Request a week’s extension on rent, or offer half the car payment today and the rest in two weeks. That way you won’t borrow anything or pay fees or interest. Landlords usually want to avoid the lengthy, difficult process of eviction and the same goes for auto and home lenders and foreclosure. City utilities may offer bill averaging, so you pay the same amount every month, smoothing out winter heating and summer cooling peaks.
There are lots more payday options, including credit unions that can provide short-term loans in small amounts to established customers at very affordable rates, and social service agencies that can help you with groceries, rent, utilities and other vital bills. Selling something on Craigslist or eBay is other possibility, and others may occur to you as long as you keep front and center the idea that a payday loan usually won’t fix your problems.
Far from it, says Texas Appleseed’s Baddour: “People often have this sense that they just need a little more to get them over the hump. The problem is that the payday loan leaves them needing more and more money to pay it off, so they end up worse off.”
—Written by Mark Henricks for MainStreet