SalemNews.com, Salem, MA

Business

July 3, 2012

10 ways to avoid a debt trap

Most consumers who turn to a payday lender have found themselves in serious financial need. They are willing to pay a premium in order to get help quickly, without too many questions asked about their credit.

Unfortunately, it rarely turns out well. Jacqueline, of Jersey City, N.J. says she took out a $300 loan from One Click Cash.

“I fell behind a payment,” she wrote in a ConsumerAffairs review. “They drained my bank account. I paid them $200.00 toward the loan in January 2012 The bank had to closed my account in December 2011 because of excess fees. I had to make alternative payment arrangements to pay them back. Now they are charging me more money than my $300.00 loan I borrowed.”

That's often how it works. The original loan is hardly ever the problem. If the consumer can pay it back within the allotted two weeks, along with the fee, then it was an expensive loan but not an ongoing problem. In reality, most people can't pay the loan back in two weeks and have to take out another, then another.

The best way to avoid this situation is not to have to approach a payday lender in the first place. Right, easier said than done. But good money management is always your best defense. So here are 10 steps to getting on a firmer financial footing.

10 steps

  1. Evaluate finances and set a realistic budget. This means living below, not above your means, since you need money left over each month for savings.
  2. Start a savings account and increase the amount contributed with raises, bonuses and extra earned cash. In other words, when you receive extra money, save it, don't spend it.
  3. Be wary of phrases such as “rent to own,” “no money down,” “must act now” and “bad or no credit welcome.” Financing plans that target people with poor credit always carry high fees and onerous terms. Avoid them at all costs!
  4. Do not buy items if they cannot be paid for in cash, or unless you have a realistic plan for repaying the loan. If people followed this advice there would be much less debt problem.
  5. Recognize that there are no quick fixes for financial issues and focus on long-term goals.
  6. Never accrue new debt to pay off old debt. That just begins a debt spiral.
  7. Fully understand loan documents before signing and never sign an agreement with blank spaces.
  8. Consult an objective professional, such as an attorney, if advice is needed on a loan agreement.
  9. Make comparisons and shop lenders and fair terms before committing to an agreement.
  10. Take time to consider all the aspects of a loan. Resist pushy sales practices and remember that there is no obligation or commitment until the contract is signed.

Of course, consumers who are already over their heads in debt have to deal with their present circumstances before they can start saving. But at least they can avoid making a mistake that makes their present situation worse – and that means avoiding predatory loans.

Story provided by ConsumerAffairs.

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