Payday loans cost consumers high fees. Here are some alternatives to borrow money.
If you have to borrow money to fix your car so you can get to work and have no alternative but to take out a payday or car title loan, at least be sure you understand what you’re signing up for.
What may appear to be a modest fee, maybe only $10, could be the equivalent of a 300% (or more) interest rate.
Payday loans are typically for $500 or less and have to be repaid in two to four weeks. You may give the lender a check to be cashed when the payment is due or authorize a debit to your bank account. Lenders usually charge $10 to $30 per $100 borrowed. A fee of $15 per $100 borrowed on a two-week loan translates to an Annual Percentage Rate (APR) of 391%. Credit card APRs average 15%.
If you can’t repay the loan when it comes due, lenders in some states (not Tennessee) may let you extend the due date for another fee – known as a “rollover.” Some payday loan borrowers fall into a “debt trap” of ever-increasing fees. One woman complained to the BBB that she borrowed $300, had already paid more than $1,200, and still owed $1,500 after multiple rollovers.
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Be cautious about car title loans
Car title loans, or simply title loans, are also short-term and expensive. You give the lender the title to your vehicle or motorcycle in exchange for a 15- or 30-day loan equal to 25 to 50 percent of its value.
Some lenders require that you own the vehicle free and clear while others may make the loan if you have substantial equity in it. The average monthly finance fee of 25% equates to an APR of almost 300% and any rollovers only add to the cost. If you choose, or are required, to buy add-ons such as a roadside assistance plan, the cost goes up even more.
The lender will take the title, look at the vehicle, and ask for a photo ID. Some may ask for a duplicate set of keys and insist on installing a Global Positioning System (GPS) so they can locate and repossess the vehicle if you don’t repay the loan on time, even if you’ve been making partial payments. They may even install starter interrupt devices to disable the ignition system and make repossession easier.
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Consider these other options
When you’re desperate, and may not have the best of credit, finding an alternative to a payday or title loan may be difficult. But the BBB offers these suggestions:
Consider a lower-cost Payday Alternative Loan from a member of the National Credit Union Administration.
Borrow from family or friends. Some employers may offer small, short-term loans to employees.
If you need the money to repay another debt, ask the current creditor to extend the payments.
On a longer-term basis, consult a nonprofit credit counseling agency for help in working out your debts and/or lowering your interest rates and setting up a monthly budget that includes adding money to an emergency fund. They may provide their services at little to no cost.
A payday or title loan is easy to get but often hard to get out of. And the consequences of not paying it back as scheduled can be ugly.
Randy Hutchinson is the president of the Better Business Bureau of the Mid-South. Reach the BBB at 800-222-8754.
This article originally appeared on Nashville Tennessean: Better Business Bureau: Here are some alternatives to payday loans
