How to Steer Clear of Payday Lending Traps

When people find themselves in a bind with unexpected expenses, it’s easy to recall payday loan stores and offers and think, “Maybe I should try that…”

Don’t fall into that trap! Although they may seem helpful at the time, they are extremely hard to pay off. Getting a loan with a payday lender could send you down a deep hole that may take years to get out of.

Payday lenders are never upfront about the fine print… Here’s how they catch and hold consumers:

To receive cash, payday lenders have you write a check to them for the loan amount plus the finance charge. The lender will cash this check the next time you get a paycheck. They’ll tell you finance charges range from $15-50 for every $100 borrowed, but won’t tell you exactly what the interest rate (or APR) will be. This is because interest rates can run from 390-780%, and if your state does not cap the maximum cost, the rates can be even higher.

Here’s the math to figure out what you’d end up paying by borrowing $400 from a payday lending store. This example uses a finance charge of $50 and a 14-day term:
• Divide the finance charge by the amount you’re borrowing: $50/$400 = .125.
• Multiply the answer by the number of days in a year: .125 x 365 = 45.625.
• Divide the answer by the number of days in the term: 45.625/ 14 = 3.2589.
• Move the decimal point to the right two places; this is your APR: 325.89%

At the end of your 14-day term, you have to pay them $450. If that still seems doable, here’s where they really get customers… When your paycheck comes in you’ll probably have other reoccurring bills to pay. Or maybe you’re still paying on that original unexpected expense.

If you can’t pay off your original loan entirely, a payday loan company will roll the balance over into a new payday loan, adding additional fees and more interest charges. At the end of your second term, which has only been a month, your original $400 balance is almost $600. And if you can’t pay that off entirely, they’ll roll it over again and restart the interest and fee process. Because these types of loans have fees and ARPs that add up so quickly, payday loan stores are even illegal in some states. But online loans are still out there and available to many people, ready to trap customers in this spiral of debt.

If you are in need of cash, you do have other options. Here are ideas of ways to access money quickly:

* Ask your employer for an advance on your next paycheck.

* Consider asking family members or friends for a short-term loan.

* If you were a military servicemember, you may be eligible for short-term lending or emergency relief assistance. Contact Military OneSource at 800-342-9647, or visit for information.

* A personal loan through Liberty Savings. We offer loans with low, fixed interest rates and for amounts that can best help your situation.

* Open a low-cost, low-interest credit card through Liberty Savings, and use it only for emergencies. (This can also help for overdraft on your account, just ask us how!)

No one wants to find themselves in a financial emergency, but there are much better options than turning to a payday lender. To find out more about payday lending and learn about safer ways to get quick cash, visit the Consumer Federation of America webpage

If you’d like help getting control of your spending, we’re here for that too. We’re committed to helping our members gain financial well-being and offer one-on-one financial counseling as well as additional resources to help you get control of your finances. Contact us for more information on free budgeting and finance courses and information we offer to our members.

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