Payday loan alternatives more important than ever
Fed crackdown could shrink number of corner quick-cash stores
Having an alternative to high-priced quick cash stores -- always a good idea -- could become more important than ever now that the federal government has taken aim at payday lenders.
The U.S. Consumer Financial Protection Bureau on March 27 proposed new payday loan rules that would, among other things, require lenders of short-term cash to verify borrowers' ability to pay. Industry representatives say the rules would force many small outlets to close.
For now, it's tough to beat the speed and convenience of payday lenders, who have more locations than many fast-food chains, and who hand cash across the counter in return for a postdated check.
People in dire straits "panic, and they go to a payday lender because they're all over the Internet, and they're on every corner," said Elaine Jones, counseling program manager at Clarifi, a consumer credit counseling service based in Pennsylvania.
Regardless of whether the federal crackdown shutters some payday lenders, financial counselors say there are better payday loan alternatives for people who can admit they need help.
Payday loan alternatives
Here are some possibilities for a quick cash infusion:
- Advance on pay. Some employers will provide a one-time, zero-interest advance on your next paycheck to meet unexpected expenses. The traditional source is the personnel department, but now some employers are starting to contract with "financial wellness" program providers. The programs may offer budget counseling and a savings plan along with a low-cost emergency loan, or longer-term loans designed for appliance purchases. One big plus of the contractor programs: You don't have to admit having a financial problem to your company.
Special bank and credit union programs. Community banks and credit unions often have unadvertised payday loan alternatives. Under a nationwide program for short-term, small amount loans, for example, some credit unions offer loans under $1,000 with rates capped at 28 percent, no rollovers, and application fees of $20 or less.
"We've had success with our small-dollar loan program in keeping our customers from going to the rental center," said Joseph Radovanic, senior vice president at Webster Five Cents Savings Bank in Massachusetts. The bank charges 12 percent interest on unsecured personal loans, compared to an average rate of more than 300 percent from payday lenders.
Community assistance. If the emergency bill has to do with keeping the lights on, check with local social service agencies or the utility itself for programs that at least spread payments over a longer time period, and may subsidize the total cost. Similarly, community clinics may have free or sliding-fee scales if you can't pay for medical treatment upfront, while doctors may accept payment over time.
Nonprofit groups in many communities will help cash-strapped households pay for necessities such as appliances, said Jones. Try looking up local community service organizations, church-linked groups, or get referrals from a local nonprofit credit counseling service.
"There are lots of resources like that people don't know about," Jones said.
Avoiding the debt
Sometimes the best way to cope with an emergency expense is to avoid it, budget counselors say. For example, users of payday loans often say they had to pay for car repairs in order to get to work. But "maybe they can live for a little bit without it" and save for repairs,, Jones said. "Is there public transportation; can you get a ride from somebody?"
Some expenses only seem urgent. Sandy Shore, a spokeswoman for NaviCore Solutions, a nonprofit credit counselor based in New Jersey, discussed the case of a mother who was struggling to pay for her child's school trip. "If it's not a real emergency, you have to look at your priorities," she said. Sitting kids down and explaining the realities of the family budget may be difficult, she said, but "with kids, you have to be honest with them -- and that kid is probably learning a valuable life lesson."
The recurring emergency
One reason why payday loans pose a financial danger is that one is rarely enough. The U.S. Consumer Financial Protection Bureau found that nearly half of the payday loan users it studied took out 10 or more of the high-cost loans a year.
Repeated borrowing at high rates is a symptom of deeper financial problems than an unexpected bill. "It's rarely a one-time expense," said Dana Wiggins of the Virginia Poverty Law Center, which operates a hotline for people in financial difficulty. "There are all kinds of things that cause them to need extra money every month."
When the cash shortage is chronic, the answer is to tighten the household budget, unless extra income can be found. Consumer credit counseling organizations will provide free budgeting help as part of their nonprofit mission. Finding ways to trim household expenses will leave a cushion to deal with the unexpected.
"Often people have expenses that are eating up their available funds," Jones of Clarifi said. "Whether it's something like a cellphone bill or a cable bill, you don't realize how much you're spending."
Reaching out to a counselor for help, or to an employer or community agency, is difficult for many people who prize their self-reliance, counselors said. "There is pride involved," Jones said. It's important to remember that most people struggle with financial problems at some point in their life, she added.
"If you're trying to save yourself embarrassment, well, you're probably better off with a little embarrassment," she said. If the payday loan turns into a mushrooming burden that absorbs resources, embarrassment is a mild consequence in comparison. "You're going to wind up in collections anyway," she said.
See related: How employer salary advances work
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