Credit counselors warn against Christmas payday loans

With Christmas just three days away, most consumers would love a little extra boost into their cash flow.

Taking out a payday or cash advance loan is not the way to go, warn credit counselors.

Payday advertisements appeal to customers with the promise of no credit checks, said Jeff Telling, Central Illinois regional manager for Family Credit Counseling Service in Normal. Those offers are even more tempting now during the giving time of the year, but consumers will pay for the loan in annual interest rates possibly in excess of 1,800 percent, Telling said.

“I see no positive benefits in it regardless of what the advertising says,” Telling said. “It’s not even a last resort to me. It’s a never.”

Payday loans are marketed as short-term cash advances on the borrower’s next paycheck, but many Americans end up caught in a debt trap, as 90 percent of payday lending revenues are based on repeat borrowers, according to a survey from the North Carolina-based Center for Responsible Lending. The average payday borrower pays back $793 for a $325 loan, which equals a total of $4.2 billion in payday lending fees.

Representatives at a few local cash advance and payday loan businesses declined comment Friday.

David Hill, credit counseling coordinator at Chestnut Credit Counseling Services in Bloomington, recognizes the alternative to not taking out a payday loan sometimes could be financially worse than the high interest-rate loans. Maybe the penalty on a late bill or the repercussions of not fixing your car would cost a consumer more, for example, he said.

At the same time, he knows people in Central Illinois have run into problems with payday loans, particularly if they are not able to repay them in the agreed-upon time frame.

Consumers typically have two weeks to pay back a payday-type loan. If they can’t pay it back in that time, they can roll it over into a new loan.

“The average person will not pay it off in the two-week period,” Telling said. “It rolls over.”

Many times, consumers will write a post-dated check to the payday lender based on the assumption they will repay the loan in two weeks. If they don’t pay back the loan or roll it over, the lender will cash the check, and the consumer could end up with another problem — a bounced check, Telling said.

Simply put, the impact of payday loans generally puts borrowers into an endless cycle of debt, Telling said.

He tells the story of a person who visited him six months ago with no payday loans. The individual, who didn’t follow Telling’s advice to look at his cash flow and live within his means, recently came back with five payday loans. The client thought the loans would be a short-term solution to what’s actually a long-term problem, Telling said.

“You can’t borrow your way out of debt,” Telling said. “They’re supposed to be a quick fix. They’re not. They’re an additional burden on the people because of the exuberant interest rates.”

Consumers need to look ahead with their finances and save money throughout the year, Hill said.

If consumers feel the need to get a payday loan to cover holiday shopping, that’s probably a big sign they have not planned for their expenses, he said.

“Christmas is nothing unexpected. We know it’s coming. We know we’re going to spend some extra money. There’s a lot better ways of preparing for that,” Hill said.

If consumers are thinking about getting a payday loan — or already have one — for any reason, Hill hopes the experience is a wake-up call for them to take a better look at their finances. It’s simply good money management to have money set aside to pay for emergencies and other situations, he said.

Source:http://www.pantagraph.com/articles/2007/12/21/money/doc476c4f60c9e70335661236.txt