By Dr. Daniel B. Prescott, Jr.
We all have an understanding of what tough financial times are about. I’ve scarcely come across anyone in my life who didn’t have to struggle during some period in their life. A lot of us were born into poverty. Some were placed in this position due to a job loss, high medical bills or a failed business venture. There are many ways to get out of financial trouble and we preach them every day at Transformance to those who seek our counsel. But there is one option we advise you never to consider—the payday lending route.
Unfortunately, in our communities, the prevalence of payday lending operations is overwhelming. They come in many forms–payday loans, check cashing services, “Moneygrams” and car title loans. They’re often brightly advertised with catchy slogans as simple as “Get Money Today!” But they all operate on the exact same premise. They’re betting that you won’t be able to pay off your original obligation. When this becomes a reality, panic sets in. So you double down, taking out another payday loan to cover the first installment. Then another. Does this sound like a sustainable strategy? Or is it more like pulling on the lever of a slot machine, hoping in vain for a miracle payout to cover what you’ve already fed the machine?
According to research from the Pew Charitable Trusts, 12 million Americans use payday loans every year. The payday loans they take out can end up being very costly in the long run. Loan amounts generally range from $50 all the way to $1,000, depending on state laws. Payday loans are also much more expensive than other methods of borrowing money. Because it’s a trap. Do the math and you’ll see what I mean. A typical payday loan with a two-week term and a $15 per $100 fee have an annual percentage rate (APR) of nearly 400 percent, according to the Consumer Finance Protection Board.
Even credit cards can’t get away with charging this kind of interest. In fact, there a word for it. It’s called “usury,” the practice of loaning money at an exorbitant rate of return. There’s a reason that the term “loan shark” has the meaning that it does. Because even if you do survive an encounter with a shark, you’ll likely be gravely injured. In the case of payday loans, you’re the one who will be injured and it’s your credit rating that may not survive.
Payday lending alternatives
So what are your alternatives? Plenty. Here’s what you can do to avoid the cycle of payday loans. Not all may be available to you or apply to your particular situation, but please consider making changes through these short and long-term solutions:
Make a realistic budget, including your monthly and daily expenditures, and plan, plan, plan. Try to avoid unnecessary purchases. At the same time, try to build some savings: small deposits do help. A savings plan — however modest — can help you avoid borrowing for emergencies. Saving the fee on a $300 payday loan for six months, for example, can help you create a buffer against financial emergencies. If you qualify, you can enroll in Transformance’s A.I.M. (Accountable, Inspirational, Motivational) Program. If you set aside $25 per month, we’ll match it and after one year, you’ll have $600 is savings after 12 months.
Find out if you have — or if your bank will offer you — overdraft protection on your checking account. If you are using most or all the funds in your account regularly and you make a mistake in your account records, overdraft protection can help protect you from further credit problems.
Contact your creditors, bill collectors or loan servicers as quickly as possible if you are having trouble with your payments and ask for more time to pay what you owe. Many may be willing to work with consumers who they believe are acting in good faith.
Consider a small loan from your credit union or a small loan company. Some banks may offer short-term loans for small amounts at competitive rates. A local community-based organization may also make small business loans to people.
At the end of the day, payday lenders are a business, just like anything other organization requiring profitability to keep the doors open. But with a number of alternative financing options available, you definitely don’t have to help them do so.
Contact Transformance if you need help working out a debt repayment plan with creditors or developing a budget. You can make an appointment to see us by visiting Transformance’s website,www.transformanceusa.org or by calling 1-800-249-2227.
Dr. Daniel B. Prescott, Jr. is the CEO of Dallas-based Transformance Inc., a fully integrated financial services capability nonprofit. He can be reached at email@example.com.