Payday Loan Hell
Here’s the situation: You had an emergency expense. Maybe the brakes failed on your car, or your cell-phone bill was a little higher than expected this month. Perhaps the expense wasn’t such an emergency – you saw a cute pair of shoes and just had to have them, but your paycheck wasn’t coming for another week.
Then you passed a check-cashing store advertising “Easy loans NOW!” You thought: There’s my answer! But two weeks later your loan has come due and it’s eaten up a good chunk of your paycheck. You need money for living expenses, so you roll over your loan, incurring greater fees.
You don’t know when or how you’re going to pay off the loan, which continues to grow over time.
Video: The Hazards of Payday Loans
A payday loan is a small, short-term loan written against your paycheck, with payment typically due within a week or two. Interest on payday loans is notoriously high: In general, finance charges on payday loans range from 15 to 30 percent for a two-week loan period, translating to an annual percentage rate of 390 to 780 percent.
Unfortunately, payday loans aren’t the smart answer to any financial need, whether it’s an emergency or just an urge to go shopping.
The California Department of Corporations has found that most people who take out a payday loan are not just one-time customers. In fact, the department found that repeat customers make up more than 73 percent of all payday-loan borrowers in California.
Breaking the Debt Cycle
Payday loans are like robbing Peter to pay Paul. Since you’ve borrowed against your paycheck, that paycheck is going to be slimmer than usual when the loan comes due. And since you were forced to take out this loan in the first place, it’s likely that you’re living paycheck to paycheck. That means you may be forced to roll over the loan rather than paying it off, prolonging the debt cycle and increasing the amount you’ll eventually need to repay.
Video: Payday Loans Under the Microscope
Here’s a step-by-step way to get out from under the payday-loan cycle:
- Don’t write one more post-dated check. Stop getting these loans immediately.
- Understand your rights. Get the facts on the laws governing payday loans in your state, as listed on the PayDay Loan Consumer Information website. Laws regulating this industry are continuing to evolve, and you can keep track of the developments at PLIWatch.org.
- If possible, pay off the loans as soon as you can. This may involve getting a loan from a friend or family member – not the ideal situation, but better than being crushed by payday-loan debt.
- If paying off the loans is not an option, contact your lenders and explain your situation. You may be able to work out a payment arrangement. If not, the loan will go to collections – again, not the best situation, but preferable to continual grappling with payday loans.
- Get in touch with a reputable credit counselor. They can help put you on a debt-management plan so you can avoid the need for emergency loans.
- Decide which expenses are necessary in the short term and which can wait a month or so while you straighten out your finances.
- Get a clear picture of your finances so that you can create a monthly budget.
- If another need for an emergency loan arises, consider alternative sources such as asking your employer for an advance on your paycheck. This is a true advance on your pay – interest-free.
- If your payday-loan lender is harassing you with phone calls to your workplace and personal references, stop them by requesting in writing that they contact you at your home only.
- Share your story to prevent others from following in your footsteps. There are literally hundreds of personal-finance forums on the internet – get online and warn others against the perils of payday-loan debt.
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