Many cash-strapped consumers may find themselves in need of an advance payday loan this holiday season. However, Better Business Bureau serving Central, Coastal, Southwest Texas and the Permian Basin warns consumers of the high interest rates, unaffordable payment terms and high-pressure collection tactics that can make these debts impossible to get out of. According to a study by the Consumer Financial Protection Bureau, the annual percentage interest rates for payday loans average 339 percent.
Payday lenders tend to target people whose credit may not be good enough to obtain a credit card or bank loan, who therefore rely on advance short-term loans to get by. What most borrowers don’t realize is the high interest rates attached to these loans can trap them into what’s called a “debt cycle.” This debt cycle forces borrowers to repeatedly have to renew the loan and pay associated fees every two weeks until they can finally save enough to pay off the principal and get out of debt.
Before you decide to take out a payday loan, consider some alternatives like small bank loans, credit counseling and credit cards. For those with no other options, BBB offers the following tips:
- Start with trust. Check out the company’s BBB Business Review to see its rating, history of complaints and other information.
- Never pay an upfront fee. Some short-term loan providers will ask for a post-dated check to cover the amount you borrowed plus interest and fees. However, if any lender asks for those fees in cash before giving you any money, walk away — especially if it’s an online lender asking for money via wire transfer. Charging undisclosed upfront fees is illegal, and cash sent by wire cannot be traced.
- Limit the amount you borrow. Only borrow what you know you can pay off with your first paycheck. Most companies will allow you to “rollover” the balance for several weeks or months, but will tack on fees the whole time. This can result in you owing several times what you borrowed in the first place.
- Know your rights. According to the National Conference of State Legislatures; in Texas, payday lenders are required to disclose certain information before initiating a loan. That information includes the cost, the interest rate to be paid and the specific fees that will be paid.
- Read the fine print. Pay close attention to fees and consequences of non-payment. Will the company allow you to make arrangements if you cannot pay?
- Keep your documentation. Many consumers said they started receiving calls from collections agencies years after they paid off a payday loan. Some of these calls were simple errors; others were attempts by scammers to collect a debt that is not owed. Protect yourself by having documentation that all loans were paid in full.
- Know where to turn. If you feel a lender has committed fraud or taken advantage of you, file a complaint with BBB, the FTC and the Texas Attorney General.