Guest Columnist
Why Payday Loans Can Be Hazardous To Financial Health
By
Jan 26, 2010 - 8:59:08 AM

(HealthNewsDigest.com) - Every week, thousands of Americans take out payday loans -- short-term loans that borrowers must pay back when they receive their paycheck. Payday loan shops are big business. But they also can create a lingering debt that eats away at people's financial well-being.

There are 22,000 payday advance stores across the United States, lending more than $40 billion in short-term credit, according to the Community Financial Services Association.

Payday loans can have an annual percentage rate as high as 400 percent, and when factoring in compounding, the effective annual interest rate can be in the thousands of percent. In real terms, that means that over three months, a $300 payday loan could rack up more than $250 in interest and fees. By contrast, a $300 credit card carrying a 19.9 percent interest rate would run up about $15 in interest charges over the same time period. While the recommendation is not to run up credit card charges that you cannot pay off entirely each month, this example shows just how costly payday loans can be relative to other forms of credit.

In almost all cases, alternatives to payday loans exist, providing much healthier ways to stay out of this kind of debt:

Plan your spending. Create a budget that accounts for all income and expenses. Plan funds for every expense category, and discipline yourself not to spend more. Be sure to devote some amount -- even if only a few dollars a week -- to saving for unexpected costs.

Create an emergency fund. Set aside money you will not touch except in an emergency. Jump-start your fund by bringing lunch from home instead of eating out, avoiding extras such as coffee or CDs, holding a yard sale, or taking on a second or temporary job. Put the proceeds in a simple savings account that you will not accidentally empty. It is not a good idea to keep a lot of cash around the house, but if you must keep funds in cash, hide the money well -- even from yourself.

Avoid payday loan rollovers. The payday loan process can quickly get complicated. Many people "roll over" their loans, borrowing the loan again, rather than repaying it. The Federal Trade Commission has pointed out that the cost of three rollovers on a $100 loan could total $60.1 Over time, some people wind up giving more than half their incomes to payday lenders.

Check into overdraft protection. Many banks offer overdraft protection service that, for a small fee, allows you to clear a check or debit when you don't have enough funds in your account. It is not ideal, but the cost typically is much lower than a payday loan.

Borrow from a friend or relative. If you just need a few dollars to tide you over, ask for an IOU. Beware: An unpaid loan can destroy relationships, so don't use this option unless you know you can pay it back -- and borrow only on a rare occasion. Put the agreement in writing, including moderate interest you will pay or a favor you will do in return.

Talk to the creditor. If you owe a medical bill, for instance, ask your doctor about making payment arrangements. Most medical providers will work with you to pay the bill in a way you can afford.

Get help. If your bills are typically more than you can pay, look into all the options. If necessary, check with a reputable debt settlement firm to help find a way to get your debt under control.

If you find yourself in a tight financial spot, don't make the problem even more stressful with burdensome interest rates and ongoing debt. While a payday loan may make economic sense in some cases (such as to avoid an expensive late charge, or to avoid having phone, gas or electricity service turned off), it is most often a case of the cure being worse than the sickness. Think twice and plan carefully so that you can avoid the payday lender -- and take care of money problems in a healthier way.

ANDREW HOUSSER
Andrew Housser is the co-founder and co-CEO of Freedom Debt Relief, LLC, one of the nation’s largest debt settlement firms. Working for the consumer to negotiate with creditors and lower principal balances due, the company has served more than 70,000 clients since 2002. Freedom Debt Relief is a wholly owned subsidiary of Freedom Financial Network, LLC (FFN).

Housser holds a Master of Business Administration degree from Stanford University and Bachelor of Arts degree from Dartmouth College.

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