Short-Term or Payday Loans Can Leave You In a Cycle of Debt.

Consumers are cautious about the short-term lending industry – and with good reason. Finance companies tout short-term loans as a way for borrowers to get their hands on quick cash, glossing over the higher interest rates.

Many consumers aren’t buying it. In a credit union association survey of 8,069 respondents, about 89 percent said they’ve never taken out a short-term loan to pay for an emergency. Most respondents – about 75 percent – said they wouldn’t take out a short-term loan because of their comparatively high interest rates. But 20 percent of respondents said they may take out a higher interest rate loan, depending on how much of an emergency they found themselves in.

The ability to quickly cover emergency expenses is generally what can make a short-term loan seem like a good solution. According to BankRate, 61 percent of American households would not be able to pay for a $1,000 emergency out-of-pocket.

But finance companies don’t give away these loans cheaply. Western Financial, a third-party organization that connects borrowers with short-term lenders online, estimates that a $1,000 loan with a loan term of 12 months would come with a 24 percent interest rate, a 3 percent fee and a nearly 30 percent APR.

It is not unheard of for some short-term loans, known as “payday loans,” to have a 400 percent APR. These loans, named because they typically become due at the time of the borrower’s next paycheck, costs about 12 million Americans about $9 billion in loan fees each year, according to the Pew Charitable Trust.

High interest rates combined with a shorter amount of time to pay leaves many vulnerable consumers in a cycle of debt. Many states have their own laws regarding short-term lending, but predatory lenders have been known to work around legislation to create short-term loan scams that can trap consumers in a cycle of debt, according to a Finder.com article.

The U.S. government has taken steps to regulate the small-dollar, short-term lending industry in recent years. In 2016, the U.S. Consumer Finance Protection Bureau instituted a rule aimed at short-term and longer-term credit products typically offered to financially vulnerable consumers. In short, the rule required all lenders to determine how likely the borrower is to be able to pay the loan back. The rule also required lenders to provide notice when they were about to take money from a borrower’s account.

Consumers should know these are not the only options for short-term loans to cover emergencies. Louisiana credit unions have consistently increased the number of people they’ve served and loans they’ve issued over the last 12 years.

Alternatives to short-term loans

Create an emergency fund. The best way to avoid the necessity of a short-term, high-interest loan is to make sure you have enough saved to cover financial emergencies that may arise. Structure your budget so you’re putting a small amount per week into an emergency fund

Talk to your creditors. If you’re behind on bills, try talking to your creditors about working out a payment plan. Many will consider lowering or delaying a payment to help you pay off the debt in full. Make sure you understand any additional fees that may be associated with the new plan.

Consider a life insurance loan. Many whole life insurance policies allow for loans as long as you have cash value in the policy. Borrowers have their entire lives to pay the loan back and debts that aren’t repaid will be deducted from the amount the policy pays out after the holder dies.

Find a quick source of cash. Consider picking up a side-gig or selling unwanted items for extra money that you won’t need to pay back.

Try a personal installment loan. Personal unsecured installment loans are offered by responsible lenders, including credit unions and banks. In contrast to finance company loans, these products feature minimum 90-day repayment periods, installment options and limits on how often the loan can be renewed. Personal installment lenders will also take into account the borrower’s ability to pay and won’t use unfair collateral, such as car titles.

Credit unions are uniquely positioned to help members manage debt in healthy ways. For more information, visit asmarterchoice.org.

At Willis-Knighton Federal Credit Union, we want to help our members avoid these types of loans and the unescapable debit that comes with them. Check with your credit union before you go to a Payday Lender. We do make loans for smaller amounts and the term is based on the amount borrowed. The minimum monthly payment is $50. Payment frequency can be monthly, weekly, bi-weekly or semi-monthly. Single payment loans are allowed for up to 90 days.

(Partially reprinted from the Louisiana Credit Union League.)