When someone is struggling to meet their monthly bills, they can sometimes do irrational things. One of those things is to take out a payday loan. A payday loan is a small, unsecured, high interest, short-term cash loan. In most cases, consumers write a post-dated, personal check for the advance amount, plus a fee. The lender holds the check for the loan period and then deposits it, or the customer returns with cash to reclaim the check.
They are, and should be, loans of last resort. Better yet, no resort. The last thing you need is to default on a loan like this, which can have an annual percentage rate (APR) of as high as 460%. As you can imagine, late fees and interest can pile up fast in a loan like this, leaving you in a bigger hole than the one you were trying to dig yourself out of.
Of course, no one who takes out a payday loan thinks that she is going to default. She’s just trying to get her rent paid on time. But the odds are, if she is using these loans to make her monthly bills, her debt-to-income ratio is out of whack already. Payday loans only add fuel to the debt fire and are unlikely to help her get her feet under her and gain control of her finances.
In a recent L.A. Times article about these loans, Kathy M. Kristof suggests some alternatives to taking out these loans. There are some social safety nets available, such as food stamps and housing aid. Since you have to be employed to get a payday loan, you might be eligible for the earned income tax credit. You don’t have to wait until tax time to get this credit. Talk to your employer to see if you’re eligible to claim the credit through your paycheck. Kristof also suggests pawn loans instead of payday loans. This is, of course, the lesser of two evils. Kristof talked to one pawn shop who was willing to extend $100 in credit for $18.50 for four months. A payday loan of $100 renewed several times over the course of four months could end up cost $220.
While these are all worthwhile ideas, some of them may only provide short-term solutions. Someone who is relying on payday loans on a regular basis is someone who needs to consider stronger measures to get his financial house in order. Bankruptcy can eliminate payday and other loans that are keeping you from being able to get ahead. If you are feeling overwhelmed by your monthly bills, you should consider talking to a Colorado bankruptcy attorney. As the saying goes, if you find yourself in a hole, stop digging.
