Debt trap: Breaking free from the cycle of payday loans

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Benjamin John Coleman wants to ban payday loans from Rhode Island because he knows what it feels like to be desperate enough to take one out.

Even though he never had a payday loan.

Coleman, who has been in recovery for four years, said he turned to short-term credit six years ago to simply get money for drugs. "I didn't care what the interest rate was," he says.

His credit fix was a title-loan on his home, a camper trailer. He lost the trailer, but eventually turned his life around. Now Coleman helps other people who are trying to recover from drugs — and works on getting rid of what he considers another addiction: payday loans. He is a volunteer who helps update the website RIPayday.org, an organization seeking to ban payday loans from Rhode Island.

But not everybody who uses payday loans is desperate. In tough economic times, more people are turning to payday loans for temporary help — even if they have good salaries. A recent survey by Think Finance found Millennials making between $50,000 and $74,000 were 7 percent more likely than Millennials who made less than $25,000 to take out a payday loan.

What Coleman is hoping to do in Rhode Island has already happened in other states. Arizona's effective ban on payday loans went into effect in July 2010, for example. Santa Clara County, Calif. limited the number of payday loan stores in May.

But not everybody is opposed to the loans. The Pennsylvania Senate is considering legalizing payday lending after approval by the State House. By comparison in Utah, according to the Department of Financial Institutions, lenders can't allow a rollover of a loan beyond ten weeks from the initial execution date of the loan. Borrowers can make payments on loans in $5 increments or more without incurring any additional finance charges. 

THE CYCLE OF DEBT

At the center of the debate is what critics call the payday loan debt cycle. It works like this: People don't have enough money to pay their bills so they take out a payday loan. When they get their next paycheck, they pay back the entire loan plus fees that are equivalent to triple digit annual percentage rates. This, unfortunately, leaves them without enough money to pay their bills, so they take out another payday loan. Wash. Rinse. Repeat.

But is this a situation unique to just payday loans?

Richard W. Evans, an assistant professor of economics at BYU, who says he did some consulting work for payday lenders back in 2009 and 2010, doesn't think so.

"You do see people abuse these loans," Evans says. "But that is not specific to the payday lending industry. You can find people who 'can't handle their liquor' in mortgage markets, in credit card markets — in any debt market you have people who over borrow."

NOT THE POOREST

Here is your typical person who takes out a payday loan according to the Consumer Federation of America's national expert on payday lending, Jean Ann Fox: They have a low to moderate income. They have to have a bank account to be eligible for the loan. They have to have a source of income. "Consumers who use payday loans are not the most destitute in society," Fox says. "They are banked and they have a source of income."

Why are they taking out the loans?

Nathalie Martin, a professor at University of New Mexico's School of Law, and an expert on consumer law, bankruptcy and predatory lending products, says her studies show most people are taking out payday loans not for emergencies, but for regular monthly obligations. "It just creates a situation where next month or two weeks from now they have another bill to pay," she says. "I think people are far better off without this type of credit."

A study by the Center for Responsible Lending showed that 76 percent of payday loans were taken within two weeks of another payday loan — meaning that three-fourths of the loans were from people in the payday loan debt cycle.

For Evans, banning payday loans would be like banning credit cards because some people do not use them responsibly. The question is not one of banning, but of personal responsibility and freedom. The problem is not unique to payday loans.

Evans says payday loans are part of a continuum of different debt products — ranging from 30-year mortgages to installment loans for furniture. There are credit cards, revolving credit, payday loans, title loans, payday loans and so forth.

And payday loans are very transparent, Evans says. "It's just a simple transaction," he says. "You go in. You borrow $300. And then you go back and you pay back $300 plus $45 in two weeks. That's the basic transaction."

But it is the easiness and simplicity that bothers Fox with CFA, "The easy solution of walking into a payday loan store and writing a check when you don't have money in the bank and promising to pay it all back out of your next paycheck at triple-digit interest rates, to keep that check from bouncing and triggering overdraft fees, — that is not a solution," she says. "It adds to your problems."

NOT AVAILABLE EVERYWHERE

Payday lending isn't everywhere. Some states allow the loans with few regulations. Others put on various restrictions that are aimed to break the debt cycle — such as limiting the number of consecutive loans. Others have banned them outright or lowered the interest rate so they are not profitable to lenders.

"Payday lending, the way the industry wants to do it, is only legal in 37 states," Fox says. "About a third of the population of the United States live in a state that does not authorize single-payment, triple-digit-interest-rate loans."

North Carolina's payday laws were allowed to expire, ending the practice — and making an opportunity to see how ending payday lending affected people. But when a state ends payday loans, such as North Carolina, Evans says the results are mixed. "There is evidence on both sides," he says. "Some studies say that when payday lenders were banned, delinquencies and bankruptcies went up. Others showed that the (area) with payday lenders had more delinquencies. So it is an open question."

Martin agrees that the studies are not clear. "Some show people are better without this," she says. "Some show people are better with this. So they are really inconclusive."

The Community Financial Services Association of America, a trade association for payday lenders, says on its website that studies don't show a payday cycle because the number of times a customer can take out a loan is limited in most states. CFSA member lenders also offer extended payment plans at no extra cost if the borrower can't pay back the loan in time. "The vast majority of Americans, undeniably, use payday advances responsibly and, as intended, for short-term use," the CFSA website says. "State regulator reports and public company filings confirms that more than 90 percent of payday advances are repaid when due and more than 95 percent are ultimately collected."

But whether there is a cycle or not, how are those fees eventually collected?

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BREAKING FREE

Fox says up to 50 percent of the people taking out payday loans eventually default. "They just can't keep it up," she says.

If they default, they rack up bounced check fees. They may lose their bank account. Lenders initiate debt collection.

In other cases, people use their tax refund to pay it off.

People may go to their family for help.

People ask for help from churches. They've gone to credit counseling. They go to food banks and use the money they save to pay off the loan.

They may go for a larger loan, which puts them in a different type of trouble, Fox says.

Andrew Schrage, co-owner of Money Crashers Personal Finance (MoneyCrashers.com), says in extreme cases, people can always file for bankruptcy. "But keep in mind that this ruins your credit score, which takes years to rebuild," he says.

Schrage says one way out may be to generate more income. "You can conserve energy to reduce your monthly bills," he says. "Sell your unneeded electronics online, have a garage sale, start a side business — the possibilities are endless."

ALTERNATIVES

Evans list of alternatives to taking out payday loans isn't pretty. "One product people move into is to overdraw their bank account and then pay those fees," Evans says.

Bankruptcy is another "option."

People can borrow on a credit card.

They can do installment loans or collateralized loans (like title or pawn loans).

People can borrow against their home equity.

Each of these loans has a different maturity and level of collateralization, Evans says.

Fox says the first line of defense against using payday loans is an emergency savings account. 

"People say they can't afford to save money," she says, "but you can't afford to pay $75 to borrow $500 every payday either."

Fox says for a family making $25,000 a year, just $500 in an emergency savings account will make it eight times less likely they would take out a payday loan, she says.

The best time to set aside an emergency fund is during tax season when people get their earned income tax credit and child tax credit. Then, if there is an emergency or an interruption in income, people can borrow from themselves and pay themselves back when they can. This puts less stress on a family than borrowing that money and having to pay it all back on the next paycheck with fees.

Lower cost small dollar loans are sometimes available at credit unions.

"(When payday loans are not available) people do what you do when you run short of money," Fox says. "They juggle their finances, ask their family for help, ask for more time to pay their bills, ask for an advance on their next paycheck — the things people have always done when they have trouble making ends meet."

Schrage thinks a personal loan from family or friends is the best resource for help in lieu of payday loans. "If you can secure a loan from a friend or family member, do yourself a favor and put the agreed upon terms in writing to protect both parties," he says. "Also, whatever terms are agreed upon, stick to them as best you can. This way, your loan won't have any negative effects on your personal relationships."

There are also short-term credit union loans. "Some credit unions offer short-term loans with better rates than payday loans," Schrage says.

CREDIT CARDS

And there are always credit cards.

"It is certainly much less expensive to take out a cash advance on your credit card — it is still pricey, but it is much less expensive than getting a payday loan that has to be paid back at one time," Fox says.

But, surprisingly, a study in the May 2009 American Economic Review on "Payday Loans and Credit Cards" found that "most borrowers from one payday lender who also have a credit card from a major credit card issuer have substantial credit card liquidity on the days they take out their payday loans."

In other words, they could have borrowed that money on their credit cards at a much lower interest rate.

Why don't they? Evans thinks a payday loan forces people to pay back the money sooner. "They are committing themselves to pay it off," he says.

FINANCIAL LITERACY

Martin thinks the problem is financial literacy and a general culture of immediacy. "The real problem is people are not aware of how much money is coming in and how much is going out," Martin says.

Schrage agrees.

"Your best bet is to simply take control of your finances so that a payday loan is never a necessity," he says. "Create a personal budget for yourself, and commit to spending less than you make. Cut costs wherever you can, and try to generate more income, either on the side, or by working more hours at your day job."

Fox still sees payday loans as a trap — saying there is usually not enough money to pay back a payday loan in two weeks — even if the loan is free. "You don't solve a debt problem with more debt," Fox says.

Evans, however, says payday loans are no worse than any other type of debt if used responsibly. "In any debt product, there is a risk of getting into a debt spiral," he says. "In the United States, you and I have the liberty to take on more debt than we can handle. The risks of payday loans are not any greater, and are probably less than other lending products."

Source : http://www.deseretnews.com/article/765584241/Debt-trap-Breaking-free-from-the-cycle-of-payday-loans.html

Is a health savings account right for my family?

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Rising healthcare costs have caused many families to consider dropping their expensive health insurance plan for one that costs less, and only covers major medical expenses.

Often referred to as catastrophic or high deductible health plans (HDHP’s), plans compatible with health savings accounts (HSA-compatible plans) have become a popular solution to the problem of rising health insurance costs. But, before you make the leap to an HSA-compatible plan, be certain it’s the best move for your family by considering these three things.


Will More Tax Deductions Benefit Your Family?
One of the main benefits of an HSA-eligible plan is the ability to open an HSA, or health savings account, and use it to realize tax benefits. There are many expenses that have been deemed eligible by the IRS tax code to be paid for by monies in your health savings account. If you are in a relatively low tax bracket, the tax benefit may not be much of an advantage to your family. However, if you’re in a medium or high tax bracket, it could help you save hundreds of dollars on vision, dental, and medical expenses.


Is Your Family Healthy?
If your family is relatively healthy, then this is a solution you’ll want to take a closer look at. It’s important to look at your family’s total medical costs over the last few years to can get an idea of your family’s average annual medical costs. If you don’t have clear records of your family’s medical expenses, Health Partners’ annual medical expense estimator is one way to help you estimate. If your family utilizes your current health plan often, has chronic health conditions, and/or expensive medications, this may not be the right solution.


Can You Afford to Take on the Medical Risk of a High Deductible?
Moving to an HSA-eligible plan is a big decision. If your family remains healthy, the savings can greatly outweigh the risk. However, if someone is in a serious accident or gets sick, your family will be responsible to pay thousands of dollars in medical bills before your insurance starts to pay. Be realistic about whether or not you’d be able to pay your deductible if someone in your family needs medical care.

AARP offers a calculator that will help you determine whether your family is better off on an HSA-compatible health plan or a traditional health plan.

Balancing monthly savings, your medical deductible, and the health plan that’s right for your family can be difficult. But, by considering a few factors, your family will be able to determine whether or not an HSA-eligible health plan will save, or cost you money in the end. Whatever the determination, it’s an innovative solution that many families will want to explore.

Jared Balis is the owner of Utah Insurance Advisors and a licensed insurance agent who strives to help Utahns navigate the sometimes complicated Utah insurance market.


Source : http://familynews.com/is-a-health-savings-account-right-for-my-family/

Four items to consider when shopping for the family health plan

Sorting through family health insurance options is an arduous but important process. Doing some research before purchasing a plan can save you time, money, and frustration when it’s time to use your benefits.

Families looking for a health plan often consider the common plan features, such as; the doctors and hospitals that are “in-network”, the medical deductible, whether or not office visits and prescriptions are covered with copays, and preventive care. But, there are a few things that get overlooked, but shouldn’t.

Before choosing your family’s health plan, dig a little deeper by reviewing these four characteristics of the company you’re considering:


Stable Renewal Increases
Some companies have unpredictable rate increases each renewal, which can cause frustration, uncertainty, and prompt your family to search for a new plan more often. Find a company who has predictable, steady rate increases. It’s common for health insurance increases to be in the range of 7% – 9% per year. But, sometimes companies raise them much more, such as a California insurance company who proposed a 59% rate increase in 2011.


The Claims Process & Service
How does the company handle claims? Do they generally pay claims without a fight, or do they pre-deny claims and require the policy owner to prove the claims legitimacy before it’s rightly processed?

In addition, it’s good to know what the company’s claims appeal process is, and how it works, in case you do need to file a claims appeal. A responsible insurance company will outline this process in their plan brochure.


Customer Service
Customer service can vary greatly from company to company. If you ever need help with your plan, you’ll want to be sure that you can get a hold of your insurance company’s customer service department, and that they have the drive and resources to help you get answers to your questions, and your problem solved.

Here are a few customer service related questions to ask yourself about the company your family is considering:

• Is their customer service center local? Is it in the United States, or even abroad?
• What are other customer’s experiences with this company’s customer service? Search RipOff Report and read through complaints that have been posted by previous customers.
• What is their Better Business Bureau rating? Do they have unresolved complaints?

Find out if JD Power and Associates has rated the customer services of the prospective insurance company, and what rating they received.

Test them out. Call the customer service number yourself and request a brochure, provider directory, or a sample contract. Pay attention to how quick they answer the phone, how willing they are to help you resolve your issue, and whether or not they follow through with sending you the information you requested.


Financial Rating
There’s no reason to get too picky, but reviewing an insurance company’s financial rating can help you determine whether they are a reliable insurance company or not. Visit Standard & Poors to search for specific health insurance companies and discover their financial ratings. If they have a horrible rating, that should raise some serious red flags. If it’s “good” or “excellent” it’s probably a solid company.

Many families searching for a plan don’t actively consider the items above, but they are just as important as the mainstream plan details you’ll be deciding on. Take a little extra time to do some research on the company you are considering. You might prevent some serious headaches down the road!


Source : http://familynews.com/four-items-to-consider-when-shopping-for-the-family-health-plan/

What’s More Important: Your Bank Statement or Credit Card Statement?

Have you ever been hit by one of those massive credit card late fees for being a few hours late with your payment? Remember the expensive charge you received when you accidentally exceeded your credit limit?
There is little argument that fees associated with credit cards are steep. Research from CreditCards.com puts the average late fee at about $40 and average over-limit fee at $30. Once you tack on interest charges, things become expensive without much neglect. However, is your credit card statement the most dangerous financial document you receive?

Since many people have suffered the sting of credit card debt and mountainous fees for late charges and over-limit fees, the public in general is very sensitive of the costs they create. Yet, your credit card statement isn’t the only thing that comes monthly in the mail. If you have bank accounts, you are also receiving bank statements.

You might be unaware, but bank accounts can have numerous fees attached. There are overdraft fees for checking accounts and minimum balance fees for interest bearing accounts. Many accounts have monthly maintenance fees as well.

Clearly, you have a lot to manage if you are going to avoid all the fees. With all the fees Americans need to manage, what hurts banking consumers more: bank statements or credit card statements?

Bank Fees Cost More than Credit Card Fees 

According to research by the Chicago Fed, income banks earn from bank fees far exceeds income earned from credit card fees. Bank fees make up 56 percent of non-interest related income for banks, while credit card fees only earn financial institutions .72 percent of non-interest related fees.

Of course this isn’t to say that paying your credit card bill late isn’t dangerous. The Fed’s analysis did not include interest charges on late credit card balances, since it is considered interest-related. However, the disparaging difference between income earned on bank fees versus credit card fees clearly shows that the average American is unaware of how important their bank statement has become.

Your ATM Card Costs More Than Credit Card Fees 

Your bank statement isn’t the only fee that earns banks more revenue. The Fed report also showed that 1.93 percent of non-interest income earned by banks comes from ATM fees. That’s more than twice the revenue earned from credit card fees. The small charge for using the ATM may not seem like much, but it adds up quick.

Your Bank Register is More Important than Switching Banks 

Unfortunately, your greatest defense against a bank fee is fastidious record keeping. You can switch accounts to a credit union or non-commercial bank, but the fees don’t go away; they just decrease in size. Switching to a smaller bank also means earning lower interest rates on your accounts, which is a cost in itself.

When I first opened my bank account, my bank handed me a little booklet to record my bank transactions between my monthly statements. It was easy to keep when I was young and a deposit or withdrawal was infrequent. Now that I’m older and often make several transactions per day, the process is much more time consuming and inconvenient, but no less important.

Switching banks to find lower fees might be a good idea, but the only thing that will prevent losing money to bank fees is good, old-fashioned bookkeeping. Your old check register is one ancient piece of technology that’s still useful to your finances today.

JP is the author of the money blog My Family Finances, a site dedicated to helping families make wise financial decisions. He is also an MBA and works in corporate finance. 


Source : http://money.usnews.com/money/blogs/my-money/2012/06/08/whats-more-important-your-bank-statement-or-credit-card-statement