NEW YORK (MainStreet) The first time Eli Jenkins applied for a pay day loan was to pay the rent, because he'd overspent the month before on food, clothes and shoes for his children. After that, the 28-year-old chef found himself requesting pay day loans every month to make up the $300 deficit he originally borrowed to cover his budget.
"It became like an addiction," said the single father of two. "I couldn't stop and I didn't want to stop. It seemed to me to be an efficient way to make ends meet."
Today, Jenkins avoids pay day loans in favor of living within his means.
"One of the biggest flaws with traditional payday loans is that the entire amount is meant to be paid back in one installment shortly after the loan is made," said Ken Rees, CEO of Think Finance. "Someone who needs an emergency loan in the first place will likely not be financially secure enough a couple of weeks later to pay back the entire amount they borrowed."
Jenkins is one of the 12 million adults spending an estimated $7.4 billion on payday loans each year, according to Pew Charitable Trusts.
"I got out of the vicious cycle by finding a job that paid me more money at a more upscale restaurant," said Jenkins. "I am also setting aside $50 a month to create an emergency expense fund."
While the average borrower takes out eight pay day loans of $375 a year and spends $520 on interest, the APR can exceed 600%. Even cash advances on credit cards carry a lower APR and fee compared to pay day loans, but the danger to only making the minimum payment in either case is extending repayment indefinitely.
Pay day loans appear attractive, because companies that offer them do not require a credit check and are not reported to the credit bureaus.
"They're easy to get, but because there is no credit report interaction, a properly managed payday loan does nothing to help your credit reports or scores," said credit expert John Ulzheimer. "Someone who is using payday loans has other options, such as pawn shops and title loans, but they're all just as bad."
A better option is a credit builder loan from a credit union.
Rees's Think Finance is launching new credit products as an alternative to traditional pay day loans. For example, "elastic" is a line of emergency credit that employers can offer their employees that is one-fourth the cost of a payday loan with flexible and customizable repayment options.
"There are a growing number of companies like ours that are combining financial services with cutting edge approaches to analytics and technology to help drive down the cost of short term credit," Rees told MainStreet.
Nevertheless, pay day lenders are illegal in some states.
Just last month, the New York Attorney General's office settled with five debt collection firms who are to pay $279,605 in restitution and $29,605 in penalties.
"Most beneficial for New York consumers is that the attorney general has forced one pay day loan collection agency that regularly handles defaulted loans to remove the negative impact on the credit scores of some 8,850 New Yorkers," said Thomas Nitzsche, senior media relations coordinator with ClearPoint Credit Counseling Solutions.
--Written by Juliette Fairley for MainStreet