A large unexpected expense or a sudden drop in your income can leave you searching for quick access to cash. After watching a commercial full of friendly smiling faces, you may consider picking up your car keys and running down to your local payday or title loan company to get the cash you need. STOP!
Put the car keys down, and first consider the consequences of borrowing money from a payday or title loan company.
Payday and title loans are down right expensive. Payday lenders provide quick access to cash for a set fee, based on the amount borrowed – typically $10 to $20 per $100 borrowed. A payday loan term is generally 2 weeks, or whenever the borrower expects to receive his next paycheck.
A $15 charge on a $100, 2-week loan is equal to an annual percentage rate (APR) of 390%!
A title loan requires the borrower to sign over the title (the ownership) to his car in exchange for loan that typically needs to be repaid in full, plus interest, in one month. Interest rates for title loans are often quoted at a monthly rate – 12% monthly interest is equal to 144% APR. These rates make the charge on even your highest-interest rate credit card look almost reasonable by comparison.
Small Setback Made Worse
Borrowing from a payday lender or title loan company can quickly turn a small financial setback into a much bigger crisis. Borrowers often do not have enough money in their next paycheck to pay off the loan and still pay all their monthly expenses. The payday or title loan company will then offer a new loan with new finance charges, or extend the original loan with an additional fee.
The Consumer Financial Protection Bureau states that the average payday loan borrower gets 10 loans a year.
If a borrower takes out a $350 2-week loan with a fee of $15 per $100 borrowed, and extends that loan 10 times, he will owe the payday lender $525 in fees in addition to the original $350 borrowed. So while the borrower thought the original payday loan was helping dig him out of the $350 hole he was in at the beginning of the year, he is now in a much deeper $875 hole at the end of the year. In the case of title loans, this cycle often pushes borrowers closer and closer to car repossession, even if the loan was for an amount much smaller than what the car is worth.
What Are My Options?
When faced with a financial crisis, there are alternatives to payday and title loans:
1. Negotiate a payment plan with your creditors and/or utility companies. Credit card and utility companies are often willing to work out a payment plan, or even delay payments for a few months, if you are having financial challenges. It is important to work with these companies right away because they are typically more willing to work with consumers who have not missed any payments.
2. Seek out non-profit credit counseling. A credit counselor can work with you to develop a monthly budget, identify ways to reduce expenses, and help create a debt repayment plan. The Mesquite Group offers one-on-one telephone sessions to meet your individual financial counseling needs, and the The National Foundation for Credit Counseling can help locate a non-profit credit counseling agency in your area.
3. Utilize local emergency financial assistance programs. Many community and faith-based organizations provide emergency assistance to individuals in need. Contact your local United Way for a list of organizations that may be able to provide assistance.
4. Sell non-essential household items. Sometimes there is cash laying around your house in the form of furniture, electronics, or collectibles you no longer use. You can sell these items at a yard sale or through a classified ad website.
5. Plan for future financial emergencies. The best place to go in a financial crisis is to your own savings. After you have worked through the current financial crisis, start putting money into an emergency savings fund that you can rely on in the future. Financial emergencies often happen without warning, so it is important to be prepared.