Published on Wednesday, 30 November -0001 00:00
With a struggling economy, rising gas prices, high health care costs, and credit card debt, many Minnesotans may find themselves financially squeezed and looking for help. Due to a shortage of credit available through traditional lending sources, or less-than perfect credit scores, some consumers may turn to non-traditional loans such as payday loans. Consumers should beware of the high costs and fees associated with such loans, which can lead to a troubling cycle of debt for some borrowers. Such a cycle of debt can be dangerous to your pocketbook and may jeopardize your ability to pay other bills in the long run. What is a payday loan? Payday loans allow consumers to borrow against an anticipated paycheck by paying the loan company financing fees. Although payday loans are typically marketed as emergency "one-time-only" loans, many consumers who take out payday loans find themselves trapped in a downward spiral of debt as they are forced to take out a series of loans, one after another. This pattern of debt can be extremely difficult to escape. Although Minnesota law prohibits a payday lender from financing the repayment of one payday loan with another payday loan (known as a "rollover" loan), some companies may still offer you a second payday loan immediately after you pay off the first loan, increasing the amount of the loan to correspond with the amount you just paid off (sometimes called a "touch-and-go" loan"). Consumers are encouraged to thoroughly research all the fees and costs of a payday loan before agreeing to take out the loan. Do not, if at all possible, take out a payday loan to pay off previous payday loans. The interest corresponding to such a spiral of debt can be ten times the cost of even the most expensive credit cards. High Fees and Costs. In an informational brochure entitled Payday Loans=Costly Cash, the Federal Trade Commission notes that consumers pay unusually high rates to obtain payday loans, citing that a consumer who pays $115 to borrow $100 for two weeks is actually paying an Annual Percentage Rate of 391 percent. Borrowers are strongly encouraged to consult the Minnesota Department of Commerce before engaging a payday lender. Although the quick cash promised by payday or short term loans may sound attractive, consumers should make sure that they know what costs they are agreeing to pay before signing up for such loans. Under the Truth in Lending Act, loan companies are required to disclose all such rates and fees. Review all your options. Don't be rushed! Due to the high cost of payday loans and the potential for these debts to spiral out of control, consumers are encouraged to review all of their other options before agreeing to take out a payday loan. Consumers should ask themselves if they absolutely need the money urgently. If you can wait until the following payday, you may save yourself money and a headache in the process. If you are considering taking out a payday loan to pay off a bill to another company, consider contacting the company to see if you may pay the bill late, or agree to a payment plan directly with company itself. You will likely pay less to institute such a payment plan than through a payday lender. If you are unable to work out a payment plan to pay off a bill and absolutely need to take out a short-term loan, shop around at several banks or credit unions to see if you can get a better deal. More and more traditional lenders are offering short term loans, and although the interest rates charged by these lenders may also be high, they may still only be a third of what you would pay to a payday lender. Finally, consider contacting a legitimate debt counselor to assist you in paying off bills and setting up a plan to reduce your debt. Because there are unscrupulous companies out there preying on folks in trouble looking for debt assistance, however, make sure that you research a debt counselor to make sure they are not a scam. The Department of Commerce licenses debt counseling services in Minnesota. For a referral, or to discuss credit counseling further, consumers may contact the following organizations: LSS Financial Counseling Service, (888) 577-2227, www.cccs.org; or the National Foundation For Credit Counseling, (800) 388-2227, www.nfcc.org. The Better Business Bureau maintains a public record of the complaints that it receives about a given company. To research a company, contact: Better Business Bureau, 2706 Gannon Road, St. Paul, Minn. 55116-2600, (651) 699-1111 or (800) 646-6222, www.bbb.org. Minnesota lenders offering payday loans or debt counseling services are typically required to be regulated by the Minnesota Department of Commerce, which may be contacted as follows: Minnesota Department of Commerce, 85 East Seventh Place, Suite 500, St. Paul, Minn. 55101, (651) 296-4026 or (800) 657-3602, www.commerce.state.mn.us. For more information about consumer issues, contact the Minnesota Attorney General's Office as follows: Office of Minnesota Attorney General Lori Swanson, 1400 Bremer Tower, 445 Minnesota St., St. Paul, Minn. 55101; (651) 296-3353, (800) 657-3787, TTY: (651) 297-7206 or (800) 366-4812; www.ag.state.mn.us.