published Tuesday, April 22nd, 2014

Personal Finance: Breaking out of the payday loan trap

Chris Hopkins

Twelve million Americans each year take out payday loans. Bad enough, but worse still is the fact that most renew the loans many times over, incurring more in fees than the original loan amount and falling into a financial black hole. This is exactly what the lender counts upon. In fact, if every borrower repaid promptly and never returned, the industry would disappear and the problem would cure itself.

But there are steps you can take to break the cycle and begin to build a more stable financial foundation.

Start by accepting the facts. We all make mistakes and sometimes desperation can lead to hasty but problematic decisions. Acknowledge the reality and make a decision to move forward in a resolute fashion. Commit yourself to any means necessary to generate additional funds: work overtime, sell some stuff, borrow from family and eat ramen noodles three meals a day. Do whatever you can to raise the cash, pay off the loan for good and get the proverbial monkey off your back.

If the hole is simply too deep and you cannot possibly repay, try reaching out to the payday lender. Let them know (before the due date) that you are unable to meet the obligation as currently defined, and propose a reasonable repayment plan that pays down the debt incrementally over two to thee months without racking up any more outrageous fees. You should be prepared for the possibility that they may refuse to negotiate; after all, a reasonable repayment plan is not an element of their business model and they must be convinced that you (and they) have no other options.

If they agree to a plan, be sure to hold up your end of the bargain and repay precisely on time (or early if possible). The agreement should include getting your postdated check back and cancelling the withdrawal authority granted when you took out the loan so they cannot draft any additional funds. All the details should be spelled out in writing.

Then tear up their phone number.

In the event they refuse to negotiate, you may wish to escalate your response by seeking legal counsel. If your present income is below the poverty line, consider contacting your local nonprofit legal aid organization or the Bar Association for advice on how to deal with an inflexible lender. Note that your persistence in renegotiating may result in increasingly aggressive collection tactics. If so, keep in mind that debt collection is a civil matter, and any implication that you may be liable for criminal prosecution or jail time is a violation of federal law.

Perhaps most importantly, breaking the debt cycle requires reevaluating ingrained spending and borrowing habits. Get some reliable advice on how to begin. An excellent place to start is with an accredited credit counseling agency like Consumer Credit Counseling Service or another recognized not-for-profit consultant. These community-based organizations offer free or low-cost budgeting and debt management advice and, if appropriate, may help you negotiate a payoff plan with existing creditors. This type of agency is not the same as a for-profit debt settlement firm (to be avoided), so visit DebtAdvice.org to locate an NFCC member counselor. If they ask for fees up front you are in the wrong place.

Every week that passes in hock to the payday lender bores the hole deeper and delays the start of your financial reboot. If you are trapped in this vicious cycle, take action today to press the reset button.

Christopher A. Hopkins, CFA,is vice president of Barnett and Advisors in Chattanooga.

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