In early October, the Consumer Financial Protection Bureau announced it would implement long-awaited new rules aimed at limiting the power of payday and title lenders. The bureau director, Richard Cordray, has been a vocal critic of the nonbank lenders, and the agency has been working on new rules to regulate lenders in this space for several years.
“The CFPB’s new rule puts a stop to the payday debt traps that have plagued communities across the country,” Cordray said in a statement. “Too often, borrowers who need quick cash end up trapped in loans they can’t afford. The rule’s common sense ability-to-repay protections prevent lenders from succeeding by setting up borrowers to fail.”These rules will apply to both brick-and-mortar and online lenders.
What changes are happening
Lenders are going to have to prove that a borrower can afford to repay the loan
One of the major rules is a “full-payment test” that will determine if borrowers can “afford the loan payments and still meet basic living expenses and major financial obligations.” Payday lenders typically don’t run a credit report on borrowers and only usually look at a pay stub to determine if you qualify.
Most consumers end up unable to repay the loan when it comes due, usually a couple weeks later. According to the CFPB, more than 80 percent of all payday loans are rolled over or renewed. The same is true for title loans, with 20 percent of borrowers losing their vehicle to title loan companies. Because there is little regulation on interest rates, these loans usually have APRs of 300 percent or more.
However, borrowers can avoid the full-payment test if the lender meets the following requirements: It must make 2,500 or fewer covered short-term or balloon-payment loans per year and earn no more than 10 percent of its revenue from such loans.
It won’t be as easy for lenders to access funds in borrowers’ bank accounts
Another issue is that many payday and title loans require access to the user’s bank account, where payments will be automatically debited. If the user does not have the amount available in his or her account, the account will be overdrawn. This usually results in the consumer being charged overdraft fees on top of the hefty interest already going to the payday lender.
According to the CFPB, “these borrowers incur an average of $185 in bank penalty fees, in addition to any fees the lender might charge for failed debit attempts, specifically, a late fee, a returned-payment fee, or both.”
One of the rules that the CFPB installed is a limit on attempted debits, so the lender has to get authorization from the consumer to debit the account more than twice. The CFPB also hopes to limit the amount of times a loan can be extended, as a way to decrease the fees the borrower must pay.
Borrowers can repay debt more gradually
To avoid the full-payment test, payday lenders can lend up to $500 if they structure the payments so the borrower can pay them off “more gradually.” However, there will be strict rules in place for this type of loan.
For example, lenders won’t be able to offer gradual repayment plans to customers who have recent or outstanding short-term or balloon-payment loans. They also can’t make more than three loans in quick succession and can’t make loans under this option if the consumer has already had more than six short-term loans or been in debt for more than 90 days on short-term loans over a rolling 12-month period.
Few options for borrowers in need
The CFPB’s long-awaited rules may help protect borrowers from predatory lenders, but don’t solve a key issue: There just aren’t that many viable alternatives for people who need to borrow small sums quickly.
A report from the Milken Institute, “Where Banks Are Few, Payday Lenders Thrive,” found that neighborhoods with more banks tend to have fewer payday lenders, and vice versa. There was also a strong correlation between payday lenders and neighborhoods with higher African-American and Latino populations as well as a greater instance of payday lenders where there are fewer high school and college graduates.
Jennifer Harper, who researched predatory lending in Chattanooga, Tenn., as part of the Financial Independence Committee for the Mayor's Council for Women, said she hopes there will be a solution for consumers that doesn’t require them to take out a payday loan.
“We want to find an alternative to payday lending that would still allow people to access they need, without those crazy interest rates,’ she said. “Getting that quick access to cash may be fine for that day, but then it really puts a burden on the borrower long-term.”
Jason J. Howell, a certified financial planner and fiduciary wealth adviser in Virginia, agrees with the new regulations taking place.
"The CFPB is taking the opportunity to protect the most vulnerable consumers: lower-income borrowers that are typically ‘un-banked,’” he said. “The proposed rule would reduce fees that make payday loans especially hard to pay back; and that could also reduce the issuance of these loans in the first place."
Credit cards for people with poor credit scores are few and far between, but FS Card is looking to change that with its first product, the Build Card, an unsecured credit card designed specifically for borrowers with subprime credit scores.
If you’re in need of a couple of hundred dollars and your credit score falls below 600, you’re not likely to get approved for an unsecured credit card. You’re considered a subprime borrower — a lending risk to banks, who worry they won’t get their money back.
But when banks refuse to lend to risky borrowers, those consumers turn to more expensive short-term borrowing options like payday loans, auto title loans, and pawn products. Annual interest rates on those products often exceed 300%, according to research from the Pew Charitable Trusts. Paying a high interest rate and a number of additional fees attached to those short-term products can trap consumers in a cycle of debt.
What is FS Card?
FS Card was founded by former Consumer Financial Protection Bureau Assistant Director of Card and Payment Markets Marla Blow in 2014 to fill what she says was a gap in the credit card industry. Blow says she began FS Card when she noticed — after the housing market crashed in 2008 — banks began “pulling back from subprime consumers in a very directed way,” because they were wary of tougher regulations on the financial industry. As a result, those consumers turned to more expensive products like payday loans, she says.
“I wanted to be able to put that consumer into a place where, rather than having to go out and get a payday loan, they could use a credit card,” Blow says. She designed the Build Card to offer subprime consumers access to something that “a lot of our economy assumes is already present” — a rotating line of credit.
Build Card overview
The Build Card is an unsecured credit card for borrowers with subprime FICO credit scores in the 550 to 600 range (on a scale of 300 to 850). The invite-only card charges a variable 29.9% APR. The rate is high for a credit card but about 10 times less expensive than some payday loans. However, it’s not a card you’d want to open unless you are seriously in need of the funds and are looking to build your credit score.
What we like about the Build Card
Payday loan alternative
Ideally, a payday loan is used to meet short-term borrowing needs — to hold you over until you receive your next paycheck. However, Pew research shows the average borrower uses them for five months at a time on average and has to pay an average $55 fee ($95 online) each time they extend the loan, which is what makes these loans so expensive. That's $275 spent renewing a loan that's on average $375. Furthermore, Pew research found use them for everyday expenses like groceries, rent, and utilities.With access to a rotating line of credit, borrowers can extend the amount of time they have to repay borrowed money without having to pay renewal fees for a payday loan.
Unsecured credit card for subprime consumers
The Build Card is a rare unsecured credit card for those with poor credit scores. Most cards you can qualify for with a score lower than 600 are secured cards, which require a deposit to secure a credit line. For people who have a few hundred dollars on hand, a secured card is a great way to get access to credit, but many low-income Americans are not in a position to spend that kind of money.
Build your credit score
FS Card reports your activity to national credit bureau TransUnion so you can use the Build Card to improve your credit score if you maintain good credit management habits. Negative activity — like late payments and high credit card balances — will also be reported, so be sure to pay your balance on time and in full each month for best results.
Quick and easy approval process
Because you must be invited to apply for the Build Card, you are prequalified for approval. There is an excellent chance you will be approved for the Build Card, unless something on your credit report has drastically changed between the time FS Card mailed your invitation and when you apply.
No foreign transaction fees
The Build Card doesn’t charge you for using it overseas, so you don’t need to worry about racking up fees for swiping your credit card on vacation.
What we don’t like about the Build Card
As of this writing, the Build Card is invitation only and has more than 50,000 cardholders, Blow says. You'll have to wait to receive a code in the mail before you can apply for the card online, which is unfortunate for anyone who is in need of short-term funds now.
FS Card selects borrowers using an algorithm to prequalify borrowers with subprime credit scores and sends invitations to potential customers monthly. The algorithm sifts through consumer credit reporting data to identify consumers who have recently done something that reflects better borrowing habits like paying off a payday loan or an account in collections.
Blow tells MagnifyMoney FS Card will offer an open application for Build Card in 2018.
This card carries a lot of fees. If you’re trying to build your credit and have the funds to get a secured credit card that doesn’t charge an annual fee or has an interest-free period, you’re better off going that route, as it will be significantly less expensive.
Startup & membership fees: It costs Build Card customers $125 simply to open the account. FS Card charges the initial start-up fee ($53) and annual membership fee ($72) on your first statement. Although the card begins accruing interest immediately, Blow tells MagnifyMoney FS Card does not charge Build Card users interest on the start-up fees assessed to the credit card.After the first year, the annual membership is paid in $6 monthly installments, charged to the Build Card.
Authorized user fee: If you authorize another person to use your Build Card, you’ll be charged a $12 fee per authorized user.
Late/returned payment fee: Don’t miss a payment on this credit card, or you’ll be charged a whopping $35 fee.
Cash advance fee: Try your best not to take cash from this credit line — in addition to paying 29.9% interest, you’ll be charged the greater of $10 or 3% of the amount you take.
A $500 limit
If you need to borrow more than $500, you’re out of luck with this card. Everyone who opens a Build Card account starts off with a $500 limit. But remember, that limit is immediately reduced to $375 once you open the card and are charged $125 in fees. That also doesn’t leave you a lot of room to spend, considering it’s bad for your credit score to carry a balance close to your credit limit. Blow says the company may soon offer starting lines above and below $500.
Right now, FS Card checks every month to see if you’re managing the card wisely (read: making payments on time). If you are, you could qualify for a credit line increase to $750 in as soon as seven months. Blow says 59% of Build Card customers have gotten increases so far.
No 0% interest period
This card doesn’t come with an interest-free grace period. It will begin charging a 29.9% APR to your purchases immediately.
No balance transfer
The Build Card doesn’t come with a balance transfer offer, so you won’t be able to use the card as a debt consolidation tool. If you are in a large amount of credit card debt, you could try applying for a personal loan through online lenders like Lending Club or Prosper, which offer personal loans to people with credit scores below 600.
Who is the Build Card best for?
The Build Card is worth opening if you:
have a credit score between 550 and 600,
are ready to start rebuilding your credit score, and
want an alternative to payday loans in the event of an emergency but don’t have the cash on hand to open a secured credit card.
Beware: If your poor credit history resulted from poor spending habits like spending more than you could afford or making late payments, ask yourself if you’re ready to make a change. Opening this credit line won’t help your credit score any in the long run if you don’t.
How to apply for Build Card
You must be selected to apply for the Build Card. When you receive your invitation to apply, you’ll be given an offer code and application ID to enter into the application form on the Build Card website. Enter that information, your ZIP code, and the last four digits of your Social Security number to apply for approval. You should know if you're approved or not within a few minutes.
Alternatives to the Build Card
Visa® Classic from Georgia's Own Credit Union
Discover it Secured Card
OpenSky Secured Visa
Credit One Bank® Platinum Visa® for Building Credit
Type of card
Annual membership fee
$0 to $75 first year. $0 to $99 thereafter
12.99% to 17.99%
16.99% to 24.99%
Ability to upgrade to on unsecured card
Balance transfer APR
12.99% to 17.99%
6 months,then 23.99%
Balance transfer fee
$10 or 3%
Cash advance APR
12.99% to 17.99%
18.90% to 25.90% (variable)
Cash advance fee
$10 or 3%
$10 or 5%
$6 or 5%
$5 or 8%
Authorized card user fee
No additional charge
No additional charge
No additional charge
Foreign transaction fee
2% of the transaction
3% of the transaction
Late payment fee
Up to $37
Up to $37
Up to $27
Up to $37
Reports to all three major credit bureaus
Earn 2% cash bock at restaurants or gos stations up to $1,000 each quarter.
Earn 1% cash bock on alI other credit card purchases.
The payday loan trap begins innocently enough. You’re low on cash, you’ve maxed out your credit cards, and none of your family or friends can loan you the money. Borrowing $250 from a payday lender seems like a logical solution. As long as the $250 plus a $37.50 fee is paid at the end of the two-week term – the time your next paycheck comes due – you’ll be debt free. No harm, no foul.
Before you know it, you run out of money again and can’t repay the loan two weeks later. So you pay a fee to extend the loan for another 14 days. When the next term is up, you can have the lender cash your check or draw from your account for the initial amount of $250 plus the $37.50 fee, or you can pay to extend, yet again, with another fee payment.
This plot replays itself over and over again for months on end. After a year, you will have paid $975 to borrow $250. Effectively, you borrowed money with an annual percentage rate (APR) of 390%.
“It’s important to note that payday loans are structured intentionally to make it very difficult to walk away from,” says Diane Standaert, executive vice president and director of state policy at the Center for Responsible Lending. “The lender takes direct access to a borrower’s bank account in order to establish the loan, either through a check or direct access to their online account. This leverage creates a business model that makes it nearly impossible to walk away.”
This is the payday loan debt trap, but it can get worse. In this guide, we’ll explain how to get out from under a payday loan and avoid falling into the trap again.
How to Get Out of the Payday Loan Trap
There are several strategies to get out of the vicious payday loan cycle, and the strategy you choose to implement will largely depend on your financial situation.
To free up funds to pay back your loan, you’ll have to cut expenses where you can. Start by creating a budget and look at costs that are easy to cut like restaurants and other discretionary spending such as shopping trips and travel.
Next, move to some medium-cost necessities like the cable, internet, and cellphone bill or auto and rental insurance premiums. Call these companies and negotiate with them to lower costs or see if you qualify for a discount.
If you’re still having a difficult time coming up with the extra cash to pay down your loans, look to some larger expenses like your car payment and rent. It may be in your best interest to sell your car and find a more affordable mode of transportation or a less-expensive car. Consider moving or getting a roommate to reduce the cost of rent.
Finding extra money in your budget will allow you to put more income toward the debt you have acquired and catch up on your payday loans.
Work with your lenders
While you create a budget, go to your payday lender and ask if they can provide you with an extended payment plan (EPP). EPPs give the borrower more time to pay off a loan without added fees and interest and without getting turned over to a collections agency, as long as the borrower doesn’t default on the EPP.
If your lender doesn’t offer an extended payment plan, you may want to turn to any other entities you owe money to. If you have non-payday loan debt, like credit card debt, auto loans, student loans, and the like, talk to the lenders of these debts to see if they can help restructuring your debt.
Restructuring means your lender could extend the term of the loan to reduce the cost of monthly payments, or reduce the frequency of payments being made. For some student loans, you may be allowed to make income-based repayments. By reducing other required monthly payments, you will be able to put more money toward paying down your payday loans. Note that restructuring could impact your credit score, but will not be as costly as bankruptcy.
Other lenders who might be able to help
Whether you choose to work with a credit counselor or tackle the payday loan repayment on your own, another option is to seek alternative lenders who may be able to assist with getting you out of the payday lending debt cycle.
Alternative Lender #1: Friends and Family Financing
Receiving a small loan from your family is a popular option suggested on the credit website message boards. This can help you make a one-time payment to the payday lender and close your payday loan once and for all. After which, you can pay back your family in small payments made up of the fees you would have otherwise been paying to the payday lender. Typically, friends and family won’t charge you added fees or interest, so this is the most preferred and affordable route for a borrower who is strapped for cash.
Alternative Lender #2: Faith-Based Organizations and Military Relief
If you are a military servicemember or veteran or a have a religious affiliation, your participation could open up short-term lending and relief opportunities.
A few faith-based lenders have cropped up around the U.S. that are primarily focused on helping borrowers refinance their payday loans and get out of the payday lending debt cycle. One example is Exodus Lending, a nonprofit organization in Minnesota that pays off their clients’ payday loans in exchange for their clients’ paying Exodus for the loan balance over the course of 12 months without interest or additional fees.
Military service members also have protections and emergency relief assistance through various veterans organizations.
With a 600+ credit score, you may be able to secure a personal loan with an average APR between 6% and 36%, a range considerably lower than the 400% to 700% APRs that come with payday lending. Use the funds you receive through your personal loan to pay off all outstanding payday loans and close the door to payday lending for good.
Then make the minimum monthly loan payment for your new personal loan on time and in full.
Once you’ve built your credit above the 600 threshold, visit your local credit union to apply for a personal loan.
Continue to improve your credit score with responsible personal loan and credit card repayments. Over time, your score will improve yet again. Once your score is over 700, you will be eligible for even more affordable personal loans with APRs as low as 4%.
Are there times it makes sense to walk away?
There are times when bankruptcy is the best option to relieve debts you are not able to pay back. If you choose to go this route, you will be required to obtain a pre-bankruptcy credit counselor before you file.
It’s important to find a government-approved credit counselor through the U.S. Trustee Program (USTP) to ensure a reasonable counseling rate – a fee of less than or equal to $50 is considered reasonable. USTP-approved agencies are required to inform clients that services are available for free or at a reduced rate, based on the client’s ability to pay, prior to the exchange of any information and the counseling session.
A credit counselor will help evaluate your personal financial situation, create a personal budget plan, and look into alternatives to filing for bankruptcy, like restructuring debt or negotiating with your payday lender. After all options have been exhausted, your counselor can help you explore your options for bankruptcy.
Many borrowers have been told that bankruptcy is irrelevant for payday lending. They also fear that they could be arrested if they fail to make payments. This is a common myth spread by debt collectors for payday lenders. These threats are illegal, and if they happen to you, make sure to contact your state attorney general and the Consumer Financial Protection Bureau.
Low credit ratings and the absence of access to a bank account can lead to exceedingly expensive financial products. A Vanderbilt University Law School studyfound evidence that access to payday loans increases personal bankruptcy rates, doubling Chapter 13 bankruptcy filings for first-time payday loan applicants within two years.
How payday loans can lead to bankruptcy
Most payday loans are secured by getting access to a borrower’s online checking account or by receiving a signed check from the borrower for the amount of the loan plus the loan borrowing fee.
When borrowers fail to make their payment upon the loan due date, and don’t pay the extension fee, the lender can withdraw the amount due through the borrower’s online account or cash the signed check.
If the borrower doesn’t have enough funds in their account to cover the amount rendered, their check will bounce and they will incur a bounced check fee and a returned check, which impacts the borrower’s credit report and credit rating. With a record of bounced checks, the bank can go as far as shutting down the borrower’s bank account and make it difficult for the borrower to obtain any new accounts.
What are your rights with a lender?
To begin the fight against payday loans, we must review the borrower’s rights when they enter the loan agreement, understand how lenders get away with hemorrhaging money from borrowers, and what legislation is doing about it.
Payday lending isn’t legal in every state. Fifteen states and the District of Columbia (see the map above) have effectively capped payday loan interest rates at 36% APR. Residents of the remaining states without APR caps stay unprotected against the harm of the inescapable payday lending debt cycle.
According to the Consumer Financial Protection Bureau (CFPB), payday lenders are not required by federal law to offer borrowers the lowest rates available. This is because lenders charge a fixed-fee price. Some states, as Standaert mentioned, cap these fees such that the annual rate for a two-week loan doesn’t exceed the enforced rate cap.
Although lenders are not legally bound to offer the lowest rates available, federal law requires payday lenders to disclose the cost of the loan in terms of an annual APR, so the borrower will see on the website or on their contract that the interest rate is 300% or more, according to Standaert.
“Though, disclosures of the price alone do not alleviate the concerns about the predatory structures of this product,” says Standaert. “Payday loans are marketed as a quick fix to a financial emergency, but payday lenders know that their business model is built on keeping people trapped in debt they can’t repay.”
Fees versus interest
It’s important to note the language lenders use in how they structure these financial products. Payday lenders are able to charge excessive amounts in “interest” because in reality, they aren’t charging interest, they’re charging a fee.
If your payday loan were treated as a loan with a designated payback period, interest rate, and amortization schedule, then for every payment you made over the course of time you borrowed the money, a portion of your $37.50 would go to pay down your $250 loan balance.
In the case of payday loans, every payment you make to extend the loan is purely a fee-based payment, or interest-only payment with a 100% principal payment at the end of the term.
What legislation has done and will do
“A rate cap, such as what the fifteen states and D.C. have enforced, is the strongest protection they can enact on the state level. There is activity at the federal level as well,” says Standaert.
“The CFPB, has been working for the past several years to rein in the harms of the payday lending debt trap,” adds Standaert. “While the CFPB doesn’t have authority to enforce a rate cap, their strongest role is to establish rules that enforce payday lenders to assess whether the loan is affordable in light of a borrower’s income and expenses prior to issuing a loan.”
“While states have the ability to address cost, the CFPB can address the harmful nature of these loans,” says Standaert. “Restricting the predatory business practice of payday lending can allow better financial products to come to the forefront for borrowers who need financial relief.”
Standaert said that the Center for Responsible Lending and other organizations dedicated to fair financial products for consumers have seen overwhelming support for the CFPB and states to crack down on payday loans.
“Seventy-five percent of voters in South Dakota went to the ballot box this November and voted to reduce the cost of payday lending from 500% to 36%,” says Standaert. “This was the first time voters have reached a conclusion of this sort.”
“Whether the cost is too high, they have issues with how their bank account is being treated, or they have experienced unfair debt collection tactics, the CFPB accepts complaints for people from all around the country struggling with payday loans for all kinds of reasons,” says Standaert.
While there are many aspects of the millennial crowd that we admire, there are also a few things that we wouldn’t recommend emulating.
Take, for example, a recent survey from PricewaterhouseCoopers that found millennials are heavy users of Alternative Financial Services (AFS), or financial services provided outside of the traditional banking structure. In fact, the survey found that over the past five years, 42% of millennials have used an AFS product like payday loans, pawnshops, auto title loans, tax refund advances and rent-to-own products.
While a little quick cash might seem like the most important thing when you need it, it’s important to understand what you’re getting into before trying out any of these systems so you can determine if they’re really the best possible option (which, in most cases, if we’re being completely honest, they are not).
1. Payday Loans
While it may appear like a reasonable system — pay extra money for the advantage of getting cash now when you need it — if you were to sit down and actually do the math of payday loans and how much they cost you overall, you’d probably be singing a different tune. For example, a Pew Charitable Trusts survey found that states that are the least regulated when it comes to these types of loans — or “permissive” states — generally allow for payday loans due in full on a borrower’s next payday to come with an APR that ranges from 391 to 521 percent — or $15 to $20 per every $100 borrowed per two weeks.
That’s 391 to 521 percentyou’ll pay on top of your loan. Would you accept that from a credit card company? More than likely, you would not.
If you’ve never visited a pawnshop, there are some things to consider before handing over Grandma’s engagement ring for a cash loan. While rules vary from state to state regarding exactly how pawnshops work, the gist is that you bring in an item to a shop to either sell outright or to simply put on loan in exchange for cash for a certain amount of time. If you return to repay your balance in full in the agreed upon amount of time — plus the added fees and interest — then your item will be returned to you and your transaction is complete. If you can’t repay the loan, the shop keeps your item. Interest in these types of situations can range from 5% to 25% per month on average, with some states creeping up even higher.
3. Auto Title Loans
Putting your car up as collateral on a loan might seem crazy, but that’s essentially what you’re doing with a car title loan. The way it works is that borrowers give over the title of their vehicle to the lender, and then pay the lender a fee to borrow money for a given period of time. The loan must be repaid within that agreed upon amount of time — usually about 30 days — and if it’s not, the lender has the ability to take your car away. It’s a risky game to play when you can’t pay your bills, since the ability to get to and from places — in other words, your vehicle — seems like a pretty important thing to have on hand to make it to jobs, interviews and school, and any other things that will help you get on top of your bills in the future.
4. Tax Refund Advances
Tax prep services may offer to pay you out a tax refund advance on the money you’ll get back from taxes this year, but you should be wary. According to Consumer Reports, the fees associated with these types of advances can be extremely costly. For example, according to H&R Block, in order to receive a refund anticipation check — which is money due outright to you from the government — you’ll owe $35.95 in Federal RAC fees, $13 in State RAC fees and an additional $25 to receive a paper check. That’s almost $73 in fees to receive a check in what amounts to perhaps a couple of weeks earlier, and depending on the full amount of your refund, which could be a sizable chunk.
5. Rent-to-Own Products
According to the Better Business Bureau, the ‘rent-to-own’ industry has become a multi-billion dollar money-maker in America — but should you take part? While there do tend to be some pros with this type of system (flexible payments typically allow consumers to change what they owe and finish purchase on a product faster if they’d like, a customer can stop making payments and return the item at any time — in which they lose all the money they’ve put in to-date — and a person’s credit is not effected in any way by this type of purchase), there are cons as well. For example, customers who decide to make a high number of payments could end up paying double or triple what the item is actually worth, contracts have been known to be confusing, filled with jargon and some plans may even contain hidden fees. At the end of the day, if you must rent that three-piece, pull-out leather couch in order to get it, perhaps it’s not something you should own right now in the first place.
It can be easy to look at this list and say these are bad ways to come up with some cash, but when a person is facing late payments and a pile of bills, the need for money may outweigh common sense. Before looking into any of these options, though, first consider whether it’s possible to borrow money from a friend or family to cover some bills, to take out a personal loan or to ask for an advance on your pay from your employer. While perhaps a bit embarrassing, any one of these options would most likely offer better returns than any of those listed above.
Trevor* was at the end of his rope. The very, very end of it, in fact. He was in six figures of credit card debt. He wasn’t communicating with his wife at all, and he had exhausted every single financial option available to him. He couldn’t do any more balance transfers, and he couldn’t get approved for any new promotional rate credit cards fast enough to get to his next payday. He was sinking, quickly, and he didn’t know where to turn.
All he cared about was making it to his next paycheck, so he went with the only option left to him and what thousands of people across America do every day: take out a payday loan.
When things are going badly with your finances, it’s difficult to know where to turn. Many people have family or friends they can rely on for help in a financial emergency, but others seek out the “help” of a payday lender. I put “help” in quotation marks for a reason, since payday lenders rarely, if ever, truly benefit the person taking out the loan. Instead payday lenders are known for their sky-high fees and their tendency to trap people in debt who already have serious financial issues.
Trevor was one of those people, but the catch was that he actually had a very high income. Years of spending too much, however, had caught up with him. He was so nervous walking into the doors of the payday loan shop, wondering what the person behind the counter was thinking. She tried to give him a smile to reassure him, but he felt like she was judging him, his high income, and his need for $1,000 right then and right there.
It only took a few minutes, but he walked out of the shop with $1,000 cash in his hand. He felt a wave of relief. Unfortunately, the relief only lasted 10 days. He got his paycheck and went back to the payday loan shop to pay $120 in interest and fees. Of course, his financial situation hadn’t improved so he was left with the same problem. So, he took out another payday loan to get to his next paycheck.
Trevor’s situation is not uncommon. An article in the Washington Post asserts “more than 80 percent of payday loans are rolled over or are followed by another loan within 14 days.” This is because people, like Trevor, can’t afford their expenses, and borrowing money from the next paycheck is only going to help them in the short term. Eventually, they are going to be short on cash again…and again…and again. The process of payday lenders letting borrowers take out a new loan and roll their old one into it creates a deep trap of debt with interest rates that can reach in the three and four figures.
Last month the Consumer Finance Protection Bureau said soon it would propose some restrictions on payday lenders. These restrictions would call for a stricter loan process to ensure borrowers actually have the ability to repay the loans in a reasonable manner.
All of this is good news for the future of an industry that has profited on others’ financial struggles for far too long. However, the best way to avoid the trap that comes with payday loan debt cycles is to not take part in them at all.
I know this is easier said than done for someone who is in a financial pinch, but before you look for a quick fix to your money problems, instead try to utilize one of the options below:
Short-Term Financial Fixes
Use one of these methods if you are in need of a short-term loan right away. This is for those of you who are in such a bad financial position that you are considering a payday loan as a last resort.
1. Borrow money from someone you trust
It’s not easy to ask people to borrow money, but there is a way you could make it official. Instead of just asking to borrow money, actually give your family member or friend a detailed proposal asking for a particular amount, naming an interest rate, and listing out a repayment schedule. Include information about your income and the steps you will take to ensure you can pay your bills in the future. If you approach borrowing from family or friends in this way, it shows you mean business and don’t want to take advantage of them. Rather you want to pay them in interest (just not interest as high as payday lenders!)
2. Credit Union Loans
Credit unions offer loans or a personal line of credit that may help alleviate your financial struggles. Typically credit unions are situated within their communities and understand the people who live there. They will be more willing to work with you on a personal loan if they understand your current struggles.
3. Negotiating with creditors
Don’t always assume that your debt is fixed at a certain number. Anything is negotiable and at some point, people just want to get paid. This is especially true when it comes to healthcare costs, collection agencies and possibly your credit card bills. Stay strong, be firm but friendly when you ask, and you might be surprised at how much money you can save on your total debt repayment.
4. Credit card cash advance
Most credit cards have the ability to give cash advances, and many of them come in the mail with checks. This is definitely a last resort because the interest rates can be extremely high; however, they are not nearly has high as a payday loan interest rates and for that reason, should be considered before a payday loan.
Long Term Financial Fixes
1. Credit Counseling
Getting your finances on track is a very long-term process. I’ve been writing for personal finance blogs for five years now, and I still have months where I totally blow my budget and other months where I’m right on track. So, just because you’re not in the best financial shape of your life doesn’t mean you never will be. Start with non-profit credit counseling if you have a lot of debt and work towards trying to get out of it. Slowly but surely make your way to the finish line with the help of some professionals.
Budgeting is a great habit to start whether alongside credit counseling or just on its own. There are many different ways to budget, but essentially, it’s best to give each dollar a place in your budget. I like creating a budget at the beginning of the month and checking in once a week to see how things are going. That way, if I fell off the wagon and ordered too much pizza, I can do better in the weeks going forward. Budgeting will also help you realize your weak areas so you’re always aware of them. It will also help you to see which expenses might not be necessary so that you can continue to reduce them and throw that money at debt repayment instead.
3. Tracking Expenses
When you are trying to get out of debt, tracking expenses is a very difficult but effective habit to start. When you have to write down everything you spend, you are much more likely to avoid spending at all. This will help with sticking to a budget, which will in turn help with minimizing expenses and paying off debt.
You Can Break the Debt Cycle
Trevor’s story has a happy ending. He admitted that there was no way to get out of the payday loan debt on his own. He ended up borrowing the money from a family member who they paid back over time without interest. Fed up with his situation, he enrolled in credit counseling to get help. It took several months but by making massive changes to his lifestyle and large payments each month, he successfully paid off over $100,000 in debt and has been debt free ever since.
So, it is definitely possible to become financially savvy in the future even if you find yourself in debt and struggling right now. With just a few adjustments, a bit of knowledge, and a lot of support, you can definitely turn your financial life around. The way to do it, though, is through budgeting, expense tracking, smart borrowing and not payday loans.
In our weekly Fine Print Alert we call out news from the financial community and shine a spotlight on any sneaky changes in the fine print. We also share our favorite reads from the week.
FINE PRINT ALERT
Big Management Changes at Ally Bank...
Big management changes at Ally Bank continue, with Barbara Yastine, CEO of the Retail Bank, resigning.
The new CEO spent his formative years at Bank of America. The question, for shareholders and customers, is whether or not he will continue living up to the Ally brand. Ally could use its brand and low-cost funding to transform other parts of the banking sector. Credit cards, personal loans and student loan refinancing are just three asset classes that could welcome Ally's touch.
Ally customers can only hang on and see how these moves shake out...
CFPB Makes Regulatory Changes to Payday Lending...
The CFPB established regulatory changes to how payday loans operate. The proposed changes give lenders a choice. They can either focus on prevention of debt traps, through better underwriting. Or, they can choose to protect against debt traps, by making product changes. There are a different set of proposals for short-term loans (< 45 days) and longer-term loans (>45 days).
Are You Liable For Your Spouse's Tax Mistakes?Before you file a joint Form 1040 for 2014, know this: under the principle of joint and several liability, you and your spouse will both be on the hook for up to 100% of any federal income tax underpayment for the year. It generally doesn’t matter which spouse is actually responsible for the underpayment. This is true even if the tax problem for a joint-return year doesn’t comes to light until after you’ve divorced. Bill Bischoff of Market Watch shares how to protect yourself and understand tax liability.
Move Aside Payday Lenders - We Found an Even Worse Way to Borrow Money Much like payday lenders, car title lenders make their money by charging onerous fees — a typical title loan comes with a $250 upfront fee and loans have to be repaid in full within 30 days. If borrowers can’t come up with the cash, they either sacrifice their car, or they can pay another $250 to get their loan extended. And so a vicious cycle begins. According to Pew, the average title loan borrower will wind up paying $1,200 in additional fees on a loan that was originally $1,000. Mandi Woodruff exposes the issue of title loans on Yahoo Finance.
Retire on the RoadThe Martins’ vagabond lifestyle may seem like a drastic way to get the extra mile out of retirement, but plenty of similarly adventurous retirees set up housekeeping full-time or part-time in Europe, Latin America, Asia or other parts of the world. To get an idea of how many, note that the Social Security Administration sends nearly 375,000 benefit payments to banks or addresses in other countries. Plus, that statistic understates the number of retirees living abroad because many expats have their checks deposited in U.S. banks. Jane Bennett Clark shares the stories of one retired couple exploring the world in their twilight years on Kiplinger.