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.
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).
John Callaway (August 22, 1936 – June 23, 2009) was an American journalist, who appeared on radio and television as a host, interviewer and moderator. He was the original host of Chicago Tonight, a nightly news program broadcast on the Chicago, Illinois television station WTTW, serving in that role from 1984 to 1999.
John Callaway was born and...
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