Dear Dr. Per Cap,
I have a “payday loan” and now I can’t seem to get my head above water. What can I do to get outta this mess?

Signed, Nothing Left

Dear Nothing Left,

At first glance, those payday loan stores appear to offer easy money. I could tell you the story about my aunt Sue who took out a payday loan one month so she could have money to go play Bingo. Well, you probably know how that turned out. Three months and a couple hundred dollars in fees later, I paid it off for her for her birthday. She agrees that was not the best use of our money!

Payday loans are rarely a solution to financial problems. These loans are designed to trap you in a cycle of debt – it’s true. The fees are so high that while the loan might help you make it to payday, by the time you get there you will probably find yourself short on money and need to take out a new loan.  And then they got ya.  And once they got ya, they look forward to seeing you every two weeks to collect those loan fees, which can really add up.

Everyone experiences financial emergencies at some point or another and a payday loan might look like a good option. And usually those people at the payday loan store are happy to help. But remember there are a lot of more affordable options available to you – ones that don’t come with high interest rates and high fees. Consider these:

  1. Use your credit card, if you have one. Even for a cash advance, it will be less expensive than a payday loan.
  2. Ask family or close friends for a loan to float you to the next payday.
  3. Go to a local credit union, small bank or Community Development Financial Institution (CDFI) and borrow money at a more reasonable cost.
  4. Practice saving and budgeting your money if you can – it helps to have savings to get you through a tough time.

Just keep in mind that if you taking out a payday loan it probably indicates a bigger problem – getting your expenses to match your income. You probably signed up for one of these loans to make ends meet for regular day-to-day expenses or to pay for a sudden “crisis” expense. In any case, it now has you in its grip, and it’s not a pretty sight.

So if you have a payday loan, pay it off as soon as possible. And while you are doing that, let’s look at the bigger picture to get your expenses in line with your income. That will help you avoid the need to borrow money in the future and, hopefully, keep you out of the grip of high-interest payday loans.

You need to create a budget – I covered that in one of my previous columns. Budgets are the best way to see and understand 1) how much money you have coming in and, 2) how much is going out each month.  It also helps you see just what you are spending your money on.  If you have more coming in than going out, that’s good!  Start saving and investing that extra money (and pay down any debt you owe first, such as that payday loan). 

But my guess is the opposite is true – you have more going out than coming in each month.  That means you’ll have to find ways to cut back expenses in order to live within your means.  By tracking where you spend your money, it will give you some good ideas where you can cut back or eliminate altogether. These can be very hard choices: Can you take your lunch to work instead of eating out? Can you watch DVDs instead of going to the movies? How can you reduce or eliminate bills for phone, cable TV, electricity, water or natural gas? Do you really need more expensive “name brands” or will generics or less-costly alternatives be acceptable? Can you cut back on “impulse” purchases? To improve the income side of your budget, can you get a part-time or second job?

If there is just no way you can get ahead of your expenses, it might be time to seek the help of an accredited nonprofit credit counselor or counseling agency.  To learn more about payday loans and lenders, the Corporation for Enterprise Development has some great consumer information at http://cfed.org/. As well, First Nations Development Institute has several publications on payday lenders and a Financial Skills Workbook to learn more about taking care of your money at http://www.firstnations.org/knowledgecentre.

Good luck!