Breaking the payday loan cycle

Dear Debt Adviser,

Dear Larry,
I wish that I could give you an easy solution and make all your troubles go away. Unfortunately, easy answers are not in the offering for anyone caught in the payday loan cycle.

You are not the only one experiencing payday loan "agita," an Italian-American slang word that means "heartburn" -- but it also can mean times when everything goes wrong. I think the latter definition aptly fits your situation!

You do have some tough decisions to make and none, once made, without consequences. Below is a list of possible actions for you to get the payday loan monkey off your back, along with a list of the potential consequences of each action.

Action:
Stop the cycle and do not write any more post-dated checks. Don't get me wrong. I am not saying that you should walk away from your loans. Rather, be upfront with your lenders and tell them you do not have the money to pay the loans in full, but would like to work out a payment plan. Do not write another post-dated check that you know you cannot cover. I would also suggest you talk with the lenders over the phone rather than in person in the event that the lender does not respond sympathetically to your request.

Consequence: The lenders will not be happy when you refuse to pay the full amount or to write another post-dated check. Aggressive collection procedures will likely follow. You may be threatened with jail because you did not make good on your check. The law, however, is on your side and the threat is baseless. A payday loan is considered an agreement to defer payment of a debt, and therefore within the definition of credit in the Truth in Lending Act. In other words, your unpaid post-dated check is a civil matter, not a criminal one. Though you will not go to jail, you can be sued in civil court and a considerable judgment could result against you. Get a good lawyer if you do this.

Action:
Rob Peter to pay Paul. I can't believe I'm suggesting this as an option! Keep in mind the only reason I am is because the seriousness of the payday loan cycle requires it. Consider what would have to go unpaid in order to pay off all your payday loans this pay period or as quickly as possible. I know this seems like bad advice considering you probably started this payday loan hell because you had an unexpected expense that had to be paid and did not want to pay a bill(s) late. However, you may be better off paying your electric bill, car note or credit cards 30 or even 60 days late to avoid throwing more money down the payday loan whirlpool. For more details on prioritizing your bills, see Bankrate's story "Which bills to pay first when money's tight."

Consequence: You will accrue additional interest charges on those accounts that charge interest. You may be threatened with having your electricity service interrupted or your car repossessed. To help, contact the creditors that you will be paying late and let them know that you plan to pay and that you will catch up and bring your accounts current as quickly as you can. Don't worry about your credit report. It's too late already!

Action:
Contact a reputable credit counselor for help. Having the peace of mind that you are doing your absolute best will come from analyzing your income and expenses and coming up with a spending plan. It will also help if you go to court and have to show you gave your very best effort.

Consequence: You will have an objective review of your options and alternatives. You may not like what you hear, but it can't hurt if you are serious about doing your best.

As you can see, the options for stepping off the payday loan merry-go-round are not easy and not without consequences. However, continuing as you are brings its own round of consequences. Good Luck!

The Debt Adviser, Steve Bucci, is the president of Consumer Credit Counseling Service of Southern New England. Visit CCCS for additional debt advice or click here to ask a debt question.

-- Posted: Sept. 24, 2004