By Colleen Dailey
If you’ve been a one-time or regular customer at any of the 48 payday loan stores registered in the District of Columbia, don’t be surprised if you find these prolific neighborhood establishments—with their flashy neon signs and appealing messages (Fast Cash NOW!)—suddenly disappearing. On October 3, the DC Council passed legislation that requires payday loan stores to charge the same annual percentage rate (APR) as banks and credit unions: a limit of 24 percent that the payday lending industry says will put them out of business in the city. When the Payday Loan Consumer Protection Act goes into effect on January 9, 2008, the District will join 13 states as territories where fast cash loans have either been banned or regulated out of existence.
Critics of this new law—most of whom represent the payday loan industry—have argued that payday loan shops fill a need in the community, and therefore, some residents who need emergency loans now have nowhere to go for help. The truth is, several local credit unions have been offering payday loans at 16.5 percent APR or less for two or three years; but without the marketing power of their for-profit competitors, the existence of these lower cost payday loans had been somewhat a secret.
Clearly, a 15-day loan with a 16.5 percent APR is better than a 15-day loan with an APR of 300-700 percent; but regardless of the interest rate, the use of payday loans is more often than not an unwise move and the result of poor financial management. If you find yourself unable to make ends meet from one paycheck to the next, taking out a loan that must be repaid in two weeks or less is probably not a solution. Rather, it’s a temporary fix that is likely to mire you in more debt each time your paycheck arrives.
So what are the best alternatives to payday loans? The US Federal Trade Commission and other consumer protection groups recommend these strategies to avoid payday lenders:
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Request a pay advance from your employer. Consider a loan from family or friends and get the terms of the loan in writing.
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Explore small loan options at local credit unions; they often have much longer repayment periods and better interest rates than payday loans.
(For a list of local credit unions that are open to all District residents, contact the Maryland & DC Credit Union Association toll free at (800) 492-4206 ext. 113, or visit DISB’s website at disb.dc.gov) -
Use a credit card advance (but be sure you understand the interest rate and repayment terms first.)
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Request additional time to pay the bill from your creditors instead of taking a payday loan.
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Look into overdraft protection on your bank account so if you don’t have enough funds to cover a check you write, the bank will pay the check and you’ll avoid insufficient fund fees and returned check fees.
In addition to exploring the alternatives above, if you have a significant amount of debt, you should seek help from a reputable credit counselor (visit caab.org for a list of local agencies). You would also be wise to start an emergency savings account and plan ahead to prevent future financial emergencies. Try direct depositing $10-$25 each month to a savings account, and gradually increase that amount if you can afford to. For a list of financial institutions that offer savings accounts with no monthly or minimum-balance fees for at least the first 12 months, and opening accounts with monthly minimum deposit requirements of less than $25, visit the DCSaves’ website at dcsaves.org or call DCSaves at (202) 419-1442.
By exercising these options and strategies, you can save hundreds—even thousands—of dollars in interest and increase your long-term financial security. Don’t you owe that to yourself?
Colleen Dailey is the executive director of the Capital Area Asset Builders, a nonprofit that creates opportunities for people of all incomes to improve their financial management skills.
DISCLAIMER: The information or views presented in this column are those of the author and do not reflect the views of DISB.