Payday lending is big business today. Right now, about 22,000 payday loan stores are collecting about $6 Billion per year from cash-strapped consumers. Some of those consumers are caught in a never-ending cycle of borrowing, repayment, and borrowing again.
Why? Because the fees and interest rates are so high and the repayment time so short.
A consumer borrowing $150 to get him to the next payday might pay anywhere from $10 to $20 for the privilege, and the money is due in 2 weeks. He can extend the payment time, but only with further payment.
Do you know that $10 for 2 weeks on a loan of $150 equates to $240 annually... which would be 160% interest.
A cash advance on your credit card might carry a 3 to 5% fee, and if you couldn't pay it back before the next statement, you would begin paying interest. But so far, the highest credit card interest is running at about 29.9%.
But what if your credit rating is so bad that you don't qualify for a credit card?
Banks in 17 states have opted to take part in a 2008 FDIC pilot program called the Small-Dollar Loan Pilot Program. This is a 2-year program designed to show how banks can profit from offering small loans to consumers with bad credit.
Loans are offered in amounts up to $1,000 - and at interest rates up to 36%. That sounds high until you look at that 100% PLUS that people pay at pay day loan stores. Payment periods offered, while not "long term," are longer than those offered on pay day loans.
Credit Unions in many states are also stepping up with alternatives. They're offering small consumer loans to the same folks who generally frequent pay day loan centers - those whose credit doesn't allow them access to reasonably priced credit cards.
Along with short term loans, credit unions offer credit counseling to help consumers end the spiral of debt. In many cases, the consumer is required to deposit a small percentage of the loan into a savings account - creating a rainy day fund he or she may never have considered before.
Credit Unions are non-profit institutions with an interest in the local community - and an interest in helping community members prosper. You can visit the Credit Union National Association's website to locate a credit union in your area and see if they offer low -dollar, short-term loan options.
And do take advantage of their money management counseling. Learning to manage your money instead of letting it manage you is a giant step toward a successful future.
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