4 Tips to Avoid the Payday Loan Trap

High fees and controversial collection practices have made lenders who offer payday loans a target of regulators and consumer protection advocates. Now an unexpected source is joining the combat.Before this week, JPMorgan Chase (JPM) said that it would limit overdraft fees, resulting from payday-lender payments and make it easier for customers to close accounts and issue stop-payment orders on checks for payday loans. The move comes after a New York Times article reported questionable practices among big banks JPMorgan, Bank of America (BAC), and Wells Fargo (WFC) in allowing automatic withdrawals from bank accounts for payday-loan payments even in countries where such loans are illegal.

Take your lenders for help:

Creditors have a reputation for being hard-nosed and impossible to negotiate with, but in reality, they’re oftentimes willing to take steps to help you if it will increase the likelihood that they’ll eventually get their loans repaid. Often, you can get extensions that will serve your short-term cash situation. And even if you pay a late fee, it can be less than charges for a payday loan.

Start shopping around:

You can get money more cheaply from other roots than from payday lenders. Many local credit unions and small banks will provide unsecured loans to customers. Although the rates aren’t as depressed as the rates they typically charge for home or auto loans, they’re nevertheless quite a bit below what you’ll pay on a payday loan. Even credit-card advances can end up costing you less in the long run, despite upfront transaction fees and high interest rates taking effect now.

Find a pro in your corner:

Consumer credit counseling services are nonprofit organizations designed to help you better your credit. In addition to helping you work on budgeting and other personal financial planning, credit counselors can work with credit-card companies and other lenders to assist you get your existing loans in order. To make certain you’re working with a reputable credit counselor, check with the National Foundation for Credit Counseling to see if your counselor is a member. Also, the Justice Department maintains a site with a list of approved credit counseling agencies.

If you’re in the military, use the extra protection you receive:

Members of the military and their families enjoy special provisions that protect them from bad patterns of payday lenders. Interest-rate limits of 36 percent apply — that includes fees and other accusations. And payday lenders can’t require checks or bank-account access in exchange for getting the loan. Taking advantage of those protections can make a big difference in how much a payday loan cost.When you’re in a financial bind, payday loans can appear like an easy fix. But by trying alternatives, you’ll avoid what can become an endless and inescapable cycle of escalating debt that could jeopardize your finances for the rest of your life.

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