I just helped a woman with a payday loan. The interest rate was 180%. Her payments were going to total over $9,000 in this loan from California Check Cashing, LLC. Her $2500 loan was going to cost her $10,000 when she was done repaying it. We got the matter resolved for substantially less.
This situation reminded me that many people are unsure what to do if they find themselves with one of these short term or high interest loans. So here are some things to think about when you are considering one of these loans.
1. Getting stuck in the “debt cycle.” According to some studies, 91% of users of “payday loans” and other high risk loans are people who are borrowing five or more times. Only 1% of users are people who take out one loan for an emergency. You can quickly get stuck in a cycle of borrowing to pay off your existing loans.
2. High interest rates. Some of these lenders charge 90% interest for a loan to be repaid over several years. However, that can be on the loan end. Some lenders have charged interest rates that are 100% and higher. Compare this to a cash advance on a credit card at 25% or 30% and it is substantially more expensive.
3. Lack of regulation of collection practices. The Federal Fair Debt Collection Practices Act (“FDCPA”) only applies to third party debt collectors. Since most of these high risk lenders handle their own collections work, they are not subject to the FDCPA. Thus, the borrower will not have he same protections he or she may have with other types of loans.
4. Aggressive collection practices. Without the protection of the FDCPA, high risk lenders are free to use more aggressive collection techniques. For example, they may try contacting coworkers or third parties to obtain information on the borrower. They may also not advise borrowers of the right to have a debt validated or other protections available to a borrower.
Remember, if you need a loan, talk to your bank or credit union first. A short term, high rate loan should be your last option. But if you take one out, talk to an attorney if you cannot make the payments. Do not call the lender until you know your rights.