 Save, budget to defeat payday loan cycle
|  Dear
Debt Adviser,
I am someone who is caught up in the payday loan game. I want out. If I didn't have this hanging over my head, I could pay all my debts on time. I need to know if there are any debt consolidation places that can help me get out of this circle?
-- Duanya
 Dear
Duanya,
Your description, of borrowing using payday loans as a circle, is
very accurate. In fact, it has been referred to as a vicious
circle. Once you have entered the circle by taking out a loan that
is to be paid by your next paycheck, you begin a cycle that can
be extremely difficult to break.
If you are living paycheck to paycheck, as so many
American families are, and are without savings or conventional credit
(credit card, line of credit, etc.), handling an unexpected expense
can be a major problem. A payday loan can seem like a best friend
at a time like that. However, this puppy not only has a long tail,
but it can sure eat a lot and might have fleas, as well!
The main reason, as you have discovered, is that the
money from the first loan is taken from your next paycheck. That
leaves you with less income than you are used to and, for most people,
puts you behind on your usual expenses. Therefore, to catch up so
that you aren't late on any bills, you go back and get another loan
or renew your current loan.
One of the many problems with these types of loans is that until you can break the cycle of borrowing, repaying and borrowing again, you never really catch up. In other words, until you can start to save some money, you are behind the eight ball.
As an example, a person who borrows
$300 for two weeks with a fee of $10 per $100 borrowed
would pay $330 for the loan. If annualized, that
rate of interest would be 260 percent. To calculate
the cost of a payday loan visit the Consumer
Federation of America Web site.
A $30 fee may not seem like much at the time, and
the payday industry says that it's unfair to cite an annual percentage
rate when the borrowing period is only two weeks. But if you need
to renew the loan because you are unable to pay, the costs accelerate
quickly. The CFA says the average payday borrower has eight to 13
payday loans with a lender in a year. Using our example from above,
if you were the average borrower and renewed or took out a total
of eight loans for your original $300, you would end up paying $240
in loan fees for a total payback of $540! Ouch!
My advice to you is to not to look for a consolidation loan or
program before you first figure out how you can start to live on
what you earn, and then to begin to save
money.
Help is available for you and others who are trapped
in the payday-loan circle.
Contact a reputable credit counseling organization,
and it will help you by putting together a spending plan that will
allow you to finally break the payday loan circle and move on with
your life. You might want to start by contacting a member of the
Association of Independent Consumer Credit Counseling Agencies or
the National Foundation for Credit Counseling. Tell them you are
interested in getting help with creating a budget and a written
action plan. The cost should be low or free, and you should be given
a range of alternatives that will work for you.
Good luck!
The Debt Adviser, Steve Bucci, is the president of Money Management
International Financial Education Foundation and the author of Credit
Repair Kit for Dummies. Visit MMI
for additional debt advice or to ask a question of the Debt Adviser
go to the "Ask the
Experts" page and select "debt" as the topic.
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