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New Report Shows Payday Loan Alternatives Costly to Consumers

[Jun 25, 2010.]


Even the best payday loans sometimes lead consumers into repeated borrowing and high costs, with the result being borrowers with too many payday loans searching for debt solutions. The National Consumer Law Center (NCLC), a non-profit organization working on issues that impact low-income consumers, researched the products offered to consumers that are advertised as an alternative to payday loans. Instead of finding a treasure trove of low-cost loans, the NCLC found an array of expensive options.

"Too many providers of so-called payday loan alternatives hit consumers with some of the same onerous provisions that predatory lenders use to saddle unwary and vulnerable borrowers with loans they can't afford to repay," said Lauren Saunders, managing attorney of NCLC's Washington office and principal author of the report.

NCLC found that many credit unions, banks, and bank prepaid cards label some of their products as payday loan alternatives or direct deposit account advances, but that these products require triple-digit interest and an extremely short repayment term that makes them equally as harmful as fast payday loans.

Payday loans, when repaid in full and on time, can be a valuable resource for emergency cash needs. However, the NCLC says that credit unions and some small banks are providing a lower cost solution that can prevent consumers from becoming trapped by too many payday loans.

Four Requirements for Safe Payday Loan Alternatives

Requirements include:

  1. An annual percentage rate (APR), including all fees, of 36% or less
  2. A repayment term of at least 90 days or one month per $100 borrowed
  3. Allowing multiple installment payments rather than a single balloon payment
  4. No requirement for a post-dated check or electronic access to a bank account

The NCLC compared the cost of a $300 loan between typical direct lender payday loans, an overdraft line of credit from a bank, a credit card cash advance, and an overdraft loan from a bank and found that the overdraft loan was the most costly option, with an APR of 397% for four months. The least expensive option was the overdraft line of credit, at an APR of 17.5% over four months.

For consumers with a cash flow emergency, NCLC recommends applying for a small loan or, best of all, an affordable, interest-based line of credit. The key elements for consumers searching for payday loan alternatives are the ability to stretch out the payments over a longer period of time in installments, the lowest possible interest rate, and the lack of a requirement for a post-dated check.

In addition to searching for alternatives to payday loans, consumers should try to build emergency savings with automatic transfers of small sums of money into a savings account.


About Author:

Michele Lerner is a freelance writer with twenty years of experience writing articles and web content for newspapers and magazines on topics related to real estate, personal finance, and business.

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