CAUTION: Payday Lenders Ahead

Payday lenders fill a void in the financial market, but they take advantage of the misinformed, the disenfranchised, and those with poor credit scores. Having a low credit score can leave you struggling to find a way to make ends meet because banks and reputable lenders are hesitant to offer you a loan or line of credit. Payday loans provide a quick and easy way to get access to cash – for a hefty fee that usually leads borrowers into a vicious cycle of debt.

How Payday Loans Work
Linsey Knerl, 36, of Nebraska, fell down the rabbit hole of payday borrowing in 2000. “I had a bill to pay and had heard bad things about using credit card cash advances,” explained Knerl, of 1099mom.com.

Knerl only needed $40 to make ends meet after she received an unexpected medical bill, so she signed up for a $200 payday loan with a $30 fee. In two weeks, she would have to pay back $230, which was “just a 15 percent interest rate,” according to the lender.

In Knerl’s case, she thought 15 percent seemed reasonable, especially compared to an interest rate of almost 30 percent for a cash advance on a credit card. But payday lenders don’t represent the math in an accurate fashion.

“Like many people who try payday lending, my hopes of paying off the loan in two weeks was for nothing,” said Knerl.

When you can’t pay back the loan in two weeks, you need to take out a new loan or rollover the old loan and pay fees. If you roll over the loan for months, you’ll have to pay four $30 fees on the $200 loan. In other words, you will have spent $120 for borrowing $200. Knerl went to another lender to take out money to pay the first loan, and thought she would be able to pay off the second in two weeks. She couldn’t, and the vicious cycle began.

Getting Away from Payday Loans
Knerl spent hundreds of dollars in fees over three months while she tried to get her payday lending cycle under control. Ultimately, she took a cash advance on a credit card to pay lenders and then focused on her credit card debt.

If you’re stuck in a payday loan trap, Knerl recommends doing everything you can to stop the cycle. A few ways to save on expenses are to cancel your cable, make arrangements with your utility company for a late payment, and limit your spending on food.

“You’ll never regret getting out of the cycle early,” emphasized Knerl.

How to Avoid Payday Lenders
When you need cash fast, it may feel like a payday lender is your only solution. After all, there is certainly a market for these predatory loans. But there are some steps you can take to avoid having to borrow a payday loan. Start by building or maintaining a strong credit score. This will help you qualify for loans from reputable lenders. If you don’t have a credit score, you can establish a personal line of credit with your local credit union or open a credit card. A credit score of at least 700 will make you eligible for a quality credit card.

Payday loans come with high fees, and borrowers commonly have to keep taking out loans to keep up with their payments. Desperate times often call for desperate measures, but take a lesson from Knerl’s experience and avoid the payday loan trap.

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