Consumer Credit Counseling Professionals Shed Light on Payday Loans

You are up to your ears in bills this month, you have maxed out your credit cards, and you don't want to have to ask your friends and relatives for help—again. So, what do you do? A payday loan could be the quick and easy solution to your problems—until you take a closer look.

At first glance, a payday loan may seem like a quick and available resource to cure your financial woes. All too often, however, this is not the case. Consumer credit counseling agencies caution consumers to be wary of payday loans because they can often make a bad financial situation even worse. The good news is that help is available from reputable consumer credit counseling services, who educate consumers on effective budgeting techniques and alternative ways to avoid going further into debt.

How Payday Loans Work – Consumer Credit Counselors Take a Closer Look

Consumers who are in need of a fast, short-term loan sometimes opt to use a payday loan if they feel like they have exhausted all other financial resources. Payday loan companies can seem enticing—offering a "quick fix" to those who are short on cash or behind on bills. The only requirements to secure a payday loan are a valid ID, proof of employment, and a post–dated check, and are typically extended for a period of between one to four weeks. Payday loan companies require that the check be written out for the amount you want to borrow, plus a fee amount for processing the loan. If the loan is not repaid in full within that time frame, stiff penalties are usually imposed in the form of much higher than average interest rates.

Consider this scenario:
You borrow $100 with the understanding that you will repay the loan by your next payday (in two weeks). The payday loan company charges you $20 in interest upfront. When your payday arrives, you find that you are still short on cash and cannot repay your loan in full. You request an extension on your loan, and are granted one, but are assessed an additional interest rate charge. At this point, you will have to repay a total of $140.

When expressed as annual percentage rates over a two-week period:

• $100 — Amount of the loan
• With a $20 interest fee added = 520% APR
• If an extension is requested and a late fee of $25 is applied on top of the loan and interest amount = 1170% APR

Hardly seems worth it, doesn't it? If you had known you would be paying that much, would you have entered into the payday loan contract to begin with? Educating yourself on how payday loans work before you apply for one may make reconsider your options.

Be an Informed Consumer

Consumer credit counseling services advise that the first rule of thumb before entering into ANY financial contract is to read and understand the terms and conditions of the contract. This includes payday loans, and is vitally important if you want to protect yourself as a consumer. Under the Truth in Lending Act, lenders are required by law to disclose all terms of the loans they provide, including such items as interest and finance charges. Payday loans typically charge very high interest rates, which make it all the more difficult for consumers to repay on their loans.

Consumer Credit Counseling Professionals Discuss Who Uses Payday Loans

Consumer credit counseling services find that payday loan companies typically target consumers who fit the following profiles:

• The working poor: Consumers who struggle with meeting their daily financial obligations.
• Opposite ends of the age spectrum: The elderly, who may be on fixed incomes or social security, and the youth, who may be inexperienced with credit and financial matters.
• Members of the Military: Many of whom have low salaries or little experience handling financial matters.
• Consumers who are deeply in debt: When consumers become desperate to meet their financial obligations, they will often resort to high-risk lending institutions because they feel they have no other choice.

Smart Alternatives for Consumers

Even if you have fallen on hard times financially, there are better ways to help repay your debt than having to get a payday loan. Consumer credit counseling agencies suggest some viable options for those consumers who just need a bit of help getting out of their financial rut:

1. Contact a consumer credit counseling service like ours for professional assistance.
2. Contact your creditors and request an extension to your monthly due date.
3. Request an advance in your paycheck from your employer.
4. Inquire about small loans from credit unions.
5. Sign up for overdraft protection on your bank account to avoid returned check and insufficient fund fees.

It is important to stress that these alternatives should only be considered if you have exhausted all possible resources for handling your debt and have first consulted with a trusted source such as a family member or a reputable consumer credit counseling service like our CCCS agency.

Getting Help from a Consumer Credit Counseling Professional

Consumer credit counseling service agencies like our CCCS agency can be an important resource to those in need of financial assistance who want to work with a reputable, non-profit agency. Our professional credit counselors advise consumers on alternative ways to repay their debt to creditors. Our CCCS consumer credit counselors can help you with all of your credit needs and can advise you on money management skills to keep you from resorting to unfair payday loan companies for help.