Many cash-strapped consumers may find themselves in need of a loan this holiday season. The Better Business Bureau Serving Wisconsin (BBB) advises consumers to be aware that many payday lenders charge high interest rates, set unaffordable payment terms and use high-pressure collection tactics that can make these debts impossible to pay off.
A 2013 study by the Consumer Financial Protection Bureau shows that payday loans’ interest rates averaged 339 percent. In Missouri, payday loans averaged more than 400 percent, according to state finance officials, and some rates exceeded 1,000 percent.
Payday lenders tend to target people whose credit may not be good enough to obtain a credit card or bank loan and who therefore rely on advance short-term loans to get by. What most borrowers don’t realize is that the high interest rates on these loans can trap them in a debt cycle that forces them to renew the loan repeatedly, paying 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 alternatives such as small bank loans, credit counseling and credit cards. For those without these options, BBB offers the following tips:
Start with trust. Check out a lender’s BBB Business Review to see its rating, history of complaints and other information.
Never pay an upfront fee. Some short-term lenders 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 roll over the balance for several weeks or months, but they tack on fees each time you roll it over. This can result in you owing several times what you borrowed in the first place.
Read the fine print. Pay close attention to fees and consequences of nonpayment. Will the company allow you to make arrangements if you cannot pay?
Keep your documentation. Many consumers said they started receiving calls from collection 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 Missouri or Illinois Attorney General, depending on where you live.
For more advice on being a savvy consumer this holiday season or to find BBB Business Reviews of businesses or charities, go to Wisconsin.bbb.org.
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