You need money—$300 to be exact. You feel like you have no alternative, and the cash on those billboards is inviting.
So you visit a payday loan outlet.
Mouse over the image to find out the annual interest rate for that $300 payday loan."
You write a check for $360. The lender gives you $300 in cash, and keeps $60 for her fee. She says she'll cash the check you wrote in two weeks, unless you return to roll over the loan.
This is a true story. A member of Florida Central Credit Union (FCCU) used a payday loan outlet to borrow $300.
By the time she turned to her credit union for help, the woman had paid $1,100 in fees on the $300 loan. And she still owed the original $300!
She also owed money to six different payday lenders, says FCCU CEO and President, Ed Gallagly.
"This is very common. Herein lies the real problem with payday loans," explains Gallagly.
The real problem
Most people can't pay the loan back in two weeks.
Many people find themselves short of cash—especially when they just start out on their own. "Payday-to-payday is how most of us live," says Jim Blaine, president and CEO of State Employees Credit Union.
Payday loan commercials tell you it's quick and easy to borrow: you write a post-dated check and they give you cash on the spot. They hold the check, and don't cash it until your next payday.
The commercials don't mention that you're paying outrageous amounts for the loan. Payday lenders know that if you didn't have enough money this payday, you probably won't be able to pay your other bills, plus the loan, next payday.
They count on you to roll the loan over. And over. And over. That small fee quickly adds up to a sum larger than the original loan.
"If you talk to the trade association for the payday lenders, they say rollovers are infrequent, but that's not true and they know it," says Blaine.
What about me?Keep your credit report clean.
Roughly 10% of all payday loans are made to people ages 18-25. The cell phone bill is due and they don't have the money. And it's a big one.
That's why it's so important to start saving now. "You can count on needing money when you least expect it. Start saving for emergencies at an early age," says Vicki Jacobson, president of the Foundation for Credit Education in St. Louis, Mo.
Is a pawnshop loan a better deal?
You haven't put aside any money for emergencies, and you lose your job. Bills still come in.
Payday lenders lure you with their friendly service and ease of use. They don't run a credit check, and you walk out the door with cash in your hand. Many payday lenders even stay open 24 hours a day. What could be easier?
"You go into one of these places to cash checks or to get a payday loan, and they treat you like a friend," says Gallagly. "Their software for check cashing and payday loans is very sophisticated. They build up a database on you."
"They know you; they know your family, Gallagly adds. They know if you're married; they know if you have children; they know your birth date."
The convenience comes at a price—your loan's completely to the payday lender's advantage.
If you are tempted by a payday loan, check your credit union first.
If you are tempted by a payday loan, check your credit union first. Some credit unions offer a lower-cost small loan with an APR between 15% and 18%. Compare that to a payday lenders' rate of 500% or more.
At Florida Central Credit Union, "we're realistic enough that we don't make the loan for two weeks," Gallagly says. "We ask, 'how much do you feel you could comfortably pay a week?'"
Gallagly says Florida Central gives lenders a payment period "more like three months, six months, nine months, or twelve months."
Other credit unions, like State Employees Credit Union, offer members another kind of alternative to payday loans. Members can borrow up to $500 at 11.75% APR—which amounts to about $2.50—for two weeks.
Compare this to a payday loan of $500 at 520% APR—which amounts to $100—for two weeks.
Do your research
Borrowing money is a business relationship, Blaine explains. A lot of young adults don't realize that they can negotiate the terms of a loan.
"If you don't know that borrowing money is negotiable, don't know how to bargain, and don't know what the best price is, then you're always at a disadvantage," says Blaine.Compare borrowers who use different lenders.
Start your research at your credit union. Then, check the borrowing costs at a bank and payday lender.
"A payday loan is a last resort. Let's face it, even a cash advance on a credit card is typically cheaper than a payday loan," says Jacobson.
But, before you decide you need a loan, ask yourself, "why?" Gallagly says many people who use payday lenders don't have an emergency.
Stop the bleeding
While debts to payday lenders can cause you emotional and financial stress, they're not the end of the world. Help is available.
"I hate to encourage people to borrow to get out of debt, but this is a case where the bleeding has to be stopped. This is a high-priority debt," Jacobson says.
Use a budget to know exactly how much you can spend.
First step in ending a payday loan debt is to stop the interest from accumulating. One way to do this is to borrow from a credit union to pay off the loan and set up a payment plan at a lower interest rate.
If that's not possible, a local Consumer Credit Counseling service can help.
"Counseling is free (some may charge a small set-up fee for debt management program)," Jacobson says. "Reputable nonprofit counseling agencies act on behalf of the consumer to negotiate with credit issuers to reduce monthly payments."
The next part of the cure is to set up a budget. A detailed budget helps you develop your financial goals and know exactly how much you can spend without getting into trouble. The National Foundation for Credit Counselling has a network of member agencies that provide help with budgeting or debt management.
Something to think about
"This past year's college graduate is facing about $3,000 in credit card debt and $17,000 in student loans," Jacobson says. "Now, if they don't get that prized job..."
You can see where she's going with that. Today's job market is tighter than just a few years ago. Many people today graduate college and have trouble securing employment in their fields.
Jacobson says our culture is "expecting a lot out of young people to pay that all back at a very early age." She asks, "If we're expecting all of that out of people in their early 20s, is it any wonder that 10-15 years later, they're getting payday loans and debt management programs?"
Jacobson's advice: "Think twice about pledging your future, unearned income to pay off what your borrow today."
By Bridget Joyce