You don’t have to pay debts with dear life. If you’re having problems making ends meet, you don’t need to surrender control over your circumstances to payday lenders. Don’t plunge in head first with eyes closed. Learn how to spot the oppressive conditions in small dollar loans so you can avoid them. Know what other options are available. If the situation is way past avoiding and you’re waist deep in payday loans muck, recognize the lifelines that can pull you out of the hole.
In a world where the measure of a man is often his net worth, strong emotions are a natural reaction to financial difficulties. Anxiety, fear, and anger are normal reactions to financial problems. In extreme cases, mounting pressure from all fronts can cloud judgment and push people over the edge leading to debt’s most dire consequence – death:
There are everyday stories that don’t make the headlines. They’re the stories of your neighbors, your friends — of ordinary people leading lives filled with stress and anguish when debt takes a stranglehold.
Nearly nine out of ten people with debt problems also suffer from some form of mental health disorder, particularly depression and anxiety. This alarming statistic released by the Consumer Credit Counseling Service (CCCS) in the UK. A survey by MoneySavingExpert.com found that “nearly half (44%) of people who have or have had mental health problems have severe or crisis debts…only one in ten people who have never had mental health problems have severe or crisis debts.” It’s unclear whether impaired mental health is the cause or the consequence of debt problems but the fact of their strong correlation remains.
In people with bipolar disorder, spending sprees are often a sign that the person is suffering from exacerbated mania. Credit cards are often maxed out during this period, and the resulting financial mess often leads to long periods of depression. Ties with family and friends are often strained as the person copes with the twin issues of financial and mental health. Relationships at home and in the workplace suffer resulting in dysfunctional families and the loss of jobs.
Debt has the greatest impact on self-esteem. In many online forums, people with debt problems call themselves “losers,” and feel “out of control,” or “have lost the joy of being alive.” These people have thought about or attempted suicide as the final solution.
There are many reasons for borrowing as there are things that can be bought and it’s easy to pin the blame on borrowers for mismanaging their finances. In many cases, however, the anguish that people in debt feel is legitimate, like the outrage from feeling that you’ve been scammed and the fear from being stalked and threatened by collection companies. Take the case of payday loans, for example.
While rarely causing enough desperation to push borrowers over edge, payday loans can cause enough trouble to make your days a living hell. The stories follow a familiar arc. Caught in a bind and feeling like they don’t have any other options, payday loans might look like a good idea to tide borrowers over to the next payday.
It’s not surprising to know that many payday loan borrowers are also benefit recipients, those with disability, or retirees. What’s surprising is that borrowers have regular incomes and a bank account and that they actually have access to other forms of credit. What’s more, the FDIC Annual Survey says payday loans are mostly used not for emergencies but for ordinary expenses such as groceries, utilities, rent, and non-essential items like gifts and luxury items. The primary reason cited for resorting to payday loans are because they’re convenient, easy to get approved, and quick.
Getting your payday loan approved is the easy part. It’s after you sign over dotted line and get the cash that all hell breaks loose.
Aside from dealing with the devil’s own (see section on “Collectors from Hell”), you stand the chance of losing your bank accounts, losing control of your wages when loan fees and payments are debited automatically, and eventually facing the horrible prospect of filing for bankruptcy.
Payday loans aren’t always advertised as such. What exactly are they and how do you spot them? What do you look for when evaluating alternatives?
Short minimum loan term. To sync with the general payday cycle that happens every two weeks, payday loans usually have a two-week term. Around 75% of payday loan borrowers are not able to fully repay their loan within the two-week time period and are therefore obligated to apply for a loan “rollover” at additional cost. Payday lenders count on your inability to pay. If you don’t have the means to pay today, the chances of being able to repay those loans plus a fee in two weeks are remote. Genuine alternative: loans that offer terms of 90 days or at least one month per $100.
One Time Payment. While loans allow you to pay in installments, payday loans do not. You have to pay the entire loan back plus whatever interest and fees you accrued once your two weeks are up. Genuine alternative: loans that allow multiple installments to cover interests and fees as well as principal.
High interest rate. A $100 dollar loan with a two-week interest of $15 computes to a 390% APR (annual interest rate). The average cost of a payday loan is typically 400% APR, if not higher. Genuine alternative: loans with a 36% APR, or less. Fees, fines and penalties should not push the APR to triple digit levels.
Payday lenders rarely consider your ability to repay. They might try to get you to borrow the maximum amount allowed, without taking into consideration your credit history. The longer you’re unable to repay the loan, the greater their income from multiple renewal fees. Genuine alternatives will consider your ability to repay, using standard methods for checking credit history and risk assessment.
Lenders will ask for post-dated checks. If these checks bounce you’re in double jeopardy. You could even be prosecuted for writing a “bad check.” Lenders will ask for control over a bank account, such as an automatic debit arrangement. Lenders will require a wage assignment arrangement. The amount you owe is automatically deducted from your pay slip. Genuine alternatives will have no coercive security features.
A mandatory arbitration clause that forces you to give up your right to sue your payday lender for abusive lending practices. Read the fine print. Genuine alternatives will have no need for this waiver.
Leading financial adviser Dave Ramsey speaks the plain truth about debt collectors – they don’t have your best interest in mind. It’s their job to make you pay what you owe, and being nasty comes with the territory. When times are hard and the inability to pay is widespread, collectors ramp up the aggression.
A few of the tricks and the horror stories include wreaking havoc on your Facebook wall, collecting from people long dead or from people who don’t owe money, Threaten to dig up your dead daughter’s grave, impersonating a law enforcer, or even asking you to pay up when you’ve just been wheeled out of the operation room and heavily sedated. Often, just the standard operating procedure of incessantly hounding you at home and at work with rude and threatening language will be enough will provide enough vexation.
It’s your obligation to pay what you owe, but you don’t let debt collectors make you angry and scared and do something stupid like pay up instead of buying food. The Federal Fair Debt Collection Practices Act provides a fair amount of protection:
So you really need the cash? There are other ways.
Credit unions are non-profit institutions formed to serve the community. Most offer loans well below the 36% APR cap. If the credit union is working with the National Credit Union Foundation, chances are they will have a REAL (“Relevant, Effective, Asset-building, Loyalty-producing”) Solutions program. The program doesn’t have a one-size-fits-all REAL Solutions loan. However, all 650 credit unions across 34 states implementing the program have the common objective of offering affordable small dollar loan products to their members who have limited assets. It’s important to remember that some credit unions also have loan products that are, for all intents and purposes, payday loans.
Many banks offer small dollar loans that can be paid in multiples installments with annual interest rates lower than 36% and terms of 90 days or longer. One good sign is when a bank requires you to take a financial literacy course before your loan is approved. Some banks also offer lines of credit for emergency purposes, but you need to dig deep and really do your homework because up front most banks will initially offer products with the highest fees.
Taking a cash advance on your credit card, while not a good practice under normal circumstance, is a cheaper alternative than payday loans. If not managed properly, however, you’ll end up with the same problems.
Many charities and military service societies offer free or low-cost emergency loans.
However, before you fill out the paperwork, take a good hard look at some practical alternatives practiced by people living frugal and sustainable lifestyles.
Ask for extensions. What do you need the extra cash for? Some expenses such as utilities and phone bills are willing to work with customers if they call way before the bills are past due.
Find a way to earn extra. This might sound like rubbing salt on a fresh wound but you might not have explored this option thoroughly. Do you have special skills that you can earn from? Is there something you’re really good at? Baking or arts and crafts for example, or teaching lessons on a particular subject. This alternative has spawned many successful entrepreneurs who turned hobbies into successful businesses. Also explore online income opportunities. They may not pay much but could make the difference between surviving until the next payday and taking out a payday loan. If you can, find a second job.
Ask help from family and friends. Suck it all up, swallow your pride, and be honest. Tell it like it is and be prepared for the inevitable lecture. If you’re lucky, they won’t charge interest.
Sell what you don’t need, or pawn them. This a perfectly honorable way of getting cash when you need it. In the process you might realize how you’ve been spending on things that you don’t really need. You might even decide to hold a garage sale to get rid of all the clutter. Used things have value. Spend time looking for shops in your area that will buy used bottles and plastic containers, old magazines and newspapers, furniture, and other household items.
Self-help is still the best way to turn things around. There are many resources available to help you make and stick to a budget, contact creditors, deal with collectors, and manage your loans. If you feel you can’t do it yourself and you really need help The Federal Trade Commission suggests these options:
Credit Counseling: “If you”re not disciplined enough to create a workable budget and stick to it, can”t work out a repayment plan with your creditors, or can”t keep track of mounting bills, consider contacting a credit counseling organization. Many credit counseling organizations are nonprofit and work with you to solve your financial problems.”
Debt Management Plans: “If your financial problems stem from too much debt or your inability to repay your debts, a credit counseling agency may recommend that you enroll in a debt management plan (DMP). A DMP alone is not credit counseling, and DMPs are not for everyone. You should sign up for one of these plans only after a certified credit counselor has spent time thoroughly reviewing your financial situation, and has offered you customized advice on managing your money. In a DMP, you deposit money each month with the credit counseling organization, which uses your deposits to pay your unsecured debts, like your credit card bills, student loans, and medical bills, according to a payment schedule the counselor develops with you and your creditors.”
Take charge! Suicides prompted by the inability to meet payday loans are rare, but the potential troubles that payday loans can cause will affect the way you live your life. Don’t be the next payday loan horror story.
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