Practical Alternatives to Payday Loans

payday loans

Payday loans are marketed as being a convenient solution to “life situations” where there is “more month than money” as payday draws near but does not quite arrive.  Any consumer finance professional will tell you this is a false premise – a car requires predictable maintenance, for example, the tires wearing out is not an “emergency.” 


As a consumer bankruptcy attorney, I routinely counsel consumers with financial situations which are out of control.  I have yet to meet a single consumer who took out a pay day and/or auto title loan which solved their problem.  Instead, it causes even more severe problems, a long string of repeated high cost loans which traps consumers in ultimately devastating debt.   We typically address this through a consumer bankruptcy filing.


Nevertheless, I am willing to concede that there are times in life when even the most prepared consumer must take on debt.


Mike Calhoun, president of the Center for Responsible Lending, recently wrote an opinion article about options a consumer with lower credit scores can pursue as being far better than pay day loans.  You can read the full article here, but this is a summary:


  • Subprime Credit Cards.  Mike Calhoun points out that, even with interest rates as high as 36 per cent, subprime credit cards are still one-tenth as expensive as pay day loans.  New subprime credit card accounts have increase every year since 2009, Calhoun states, and in 2015 alone, more than 10 million were issued to borrowers with damaged credit.  Currently more than 62 million accounts are active.


  • Consumer finance companies (Beneficial, One Main Financial, etc.) market installment loans to households with subprime credit.  They offer bigger loans than pay day loans, Calhoun states, although they may require “collateral” in the form of household goods and furnishings.


  • More than 700 federal credit unions participate in the National Credit Union Administration’s “payday alternative loan” program.  These are loans which are good for up to $1,000, with up to six months to repay.  Calhoun says that more than 3.8 million unsecured loans were issued to consumers with credit scores below 660 in 2015.


  • Even pawn loan loans are better than payday loans.  Not only are they cheaper, Calhoun points out, there is a clear exit strategy if you cannot pay the loan.  The borrower walks away having forfeited the pawned item.  This still beats paying on a series of 400 percent payday loans with no end in sight.  Calhoun estimates more than 11,000 pawn stores cater to more than 30 million customers nationwide.


  • Finally, utilities, hospitals and other companies offer income based repayment plans for consumers who have trouble keeping up.


Calhoun goes on to disparage payday loans.   More than four out of payday loans are taken out within the same month as the previous loan.  Payday lenders structure the loans so they have the right to seize the consumer’s bank account on payday, so they get their money, while the consumer cannot pay rent or other essential expenses.  So the business model is not built on solving credit needs, it is built on creating an inescapable debt trap.


Many states have banned payday loans, and I wish Ohio would join them.  While our lawmakers did pass a law which was supposed to cap the interest on payday loans, the lenders quickly found a loophole which kept them operating in their normal vein.  In the meantime, spread the word that payday loans are simply not worth the trouble they cause.  Consider any option other than the pay day or title loan.  You can also call me at 216-642-8234 to schedule an appointment to discuss whether bankruptcy protection can offer you a fresh start.

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