Faced with bad credit and the inability to qualify for a conventional loan, many consumers turn to the payday lenders for help. While checking my email recently, I found a spam email from a payday lender offering $1500 in cash without a credit check (see headline picture). In a 2005 report, the Congress of the United States investigative arm, the Government Accountability Office (GAO), categorized payday loans as “predatory lending practices.” Anything categorized as predatory cannot be good for you.

Consumers Union, AARP and Consumer Action define payday loans as follows: "Payday" loans are small, short-term loans made by check cashers or similar businesses at extremely high interest rates. Typically, a borrower writes a personal check for $100-$300, plus a fee, payable to the lender. The lender agrees to hold onto the check until the borrower's next payday, usually one week to one month later, only then will the check be deposited. In return, the borrower gets cash immediately. The fees for payday loans are extremely high: up to $17.50 for every $100 borrowed, up to a maximum of $300. The triple-digit interest rates for such transactions are staggering: 911% for a one-week loan; 456% for a two-week loan, 212% for a one-month loan.¹
 
Unfortunately, for most consumers, the payday loan sector has realized an explosion since the early 1990s. According to industry estimates, it has grown from approximately 300 nationwide stores in 1992 to more than 20,000 in 2005.

Consumer groups have long criticized payday lenders for preying on poor and minority communities, where consumers with credit problems may not understand the high rates and fees associated with short-term loans. Loan stores often encourage customers to "roll over" debts after the two-week loan period is up, which only compounds the fees.²

• Predatory payday lending now costs American families $4.2 billion per year in excessive fees.
• States that ban payday lending save their citizens an estimated $1.4 billion in predatory payday lending fees every year.

Problems With Payday Loans
 
The GAO categorized payday loans as “predatory lending practices.” Here are some factors that contribute to the predatory nature of payday loans:

(1) Payday loans can entrap you.  Consumers who typically borrow money this way are most often in a desperate financial situation. The high rates make it difficult for many borrowers to repay the loan, thus putting many consumers on a perpetual debt spiral. Because they cannot repay the loan, they often extend the loan by paying the fees several times over. As a result, many consumers end up paying far more in fees than what they borrowed. For already desperate people, borrowing more money at triple-digit interest rates is like throwing gasoline on a California forest fire. Borrowing more money at triple-digit interest rates is never the right solution for people in debt. Instead, payday loans make problems worse. Data from consumer watch groups shows, virtually everyone takes more than one payday loan. The result is that the consumer ends-up compounding a bad financial situation because the original debt problems that brought them to the lender often goes unresolved. Payday lenders often require consumers to turn over a post-dated check, which they then deposit before the agreed-upon date, causing the check to bounce and imposing more fees on consumers. Payday loans entrap the unwitting consumer into a financial black hole.
 
(2) Payday loans hurt you with their high interest rates.  The payday loan industry seeks to justify their triple-digit interest rates by claiming that the loans are risky due to the credit rating of the consumers that take these types of loans.
In fact, in Colorado, one of the few places in the country that collects actual data from the industry, payday lenders charge-off only 3% of the loans made from 1996-1997, while their loans had an average APR of 485.26%. Conversely, California banks charged off 2.7% of credit card debt in those same years, while having an APR of 15 - 22%.(4)
 
(3) Payday lenders are aggressively expanding their preence and in most states are unregulated. In most of the fifty states, payday loan are unregulated. Hence fees and rates vary widely. 

Alternatives to Payday Loans
 
a) Create a monthly budget and learn to manage your expenses, so that they are less than your income. The word budget, like the word diet, conjures up a lot of negative thoughts in the mind of the average person. Simply take some time to compare your monthly income against your expenses; make a determination in your mind to eliminate unnecessary spending so that you can bring your expenses to be within your income. Set aside 10-15% of your monthly salary as savings. Seek help when you need it.
 
b) Advances from employers.  Many employers will grant paycheck advances to employees. Because this is a true advance, and not a loan, there are no hidden fees or interest rates.
 
c) Negotiate a payment plan with your creditors. The best alternative to payday loans is for consumers is to deal directly with their debt. Most creditors will accept partial payments if one sets up a payment plan. Consumers can negotiate such plans themselves or contact the local nonprofit Consumer Credit Counseling Services (CCCS) office for help. Paying off debts through a payment plan, rather than taking on even more debt at exorbitant interest rates, is the best way to deal with financial problems. CCCS offices also teach money management skills to help consumers prevent financial problems in the first place.⁴
 
d) Consider joining a credit union. Many employers offer their employees membership in credit unions. If you must take a loan, credit unions offer small, short-term loans to their members. Because credit unions tend to focus on service to their members over profitability, their rates can be better than the commercial banks. Many more consumers can join credit unions now that affiliation requirements are less strict. Credit unions also offer financial planning 
 
Christ died to set us free; it would be a waste of His death on Calvary if we choose to become the victim of a known predator – a payday loan. 

Footnotes:
1. Current law allows lenders to charge 15% of the "face amount of the check." Civ. Code Sec. 1789.33 (emphasis added). Because the face amount of the check must also include the fee for the loan, in order to borrow a net amount of $100, the consumer must write a check for $117.62 ($117.625 x .15 = $100). Most lenders simply round off the $17.62 amount to $17.50.
2. Military warning personnel on payday loans – Washington (AP) (2005)
3. Financial Quicksand: Payday lending sinks borrowers in debt with $4.2 billion in predatory fees every year. - Center for Responsible Lending (November 30, 2006)
4. Fact Sheet On Payday Loans - Consumers Union.org
 
About The Author
Christopher Sealey is the author of four published books on the topic of Christian stewardship. Several topical websites have rated him as an expert author on the topic of Christian stewardship. He is an experienced financial counselor.

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