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Avoiding the Debt Trap


Payday lending (sometimes called a cash advance or deferred presentment) is the practice of using a post-dated check or electronic checking account information as collateral for a short-term loan.  To qualify, borrowers only need personal identification, a checking account, and an income from a job or government benefits, like Social Security or disability payments.


Research shows that the payday lending business model is designed to keep borrowers in debt, not to provide one-time assistance during a time of financial need.  Borrowing from payday lenders usually means borrowing trouble in the long run, because consumers have a very hard time repaying these loans in one payday.


Payday lenders are not the only option for consumers facing debt problems.  Alternatives to payday loans include, but are not limited to:

Payment Plan with Creditors


The best alternative to payday loans is for consumers to deal directly with their debt. Many creditors will negotiate partial payments or work out a payment plan with you. Working out a payment plan with creditors can allow the consumer to delay payment until their next payday or lower their payments to pay off the bill over a longer period of time.


  • Find out if you can delay paying a non-interest bill such as a utility bill and make payment arrangements with the utility company.


  • Ask your creditors if there is a grace period - a time period after your payment is due when you can make payment without being charged a late charge. Your mortgage payment usually will have a 15 day grace period. Some creditors offer no grace period. The only way to know for sure is to check with your creditor.


  • Ask your creditors for more time to pay your bills.  Find out what they will charge for this service – such as a late charge – and compare these rates with other options.

Overdraft Protection


Most banks and credit unions offer checking accounts with real overdraft protection.  Payday lenders claim their fees are lower then paying bounced check fees, but a better alternative is to prevent bounced check fees in the first place.  For a small fee ($5) or no fee, banks and credit unions will cover checks written by moving money from your savings account.  Many also offer overdraft protection through a line-of-credit or a credit card at an APR of 7 – 25%.  Avoid "courtesy overdraft" or “bounce protection” programs that charge a bounced check fee and allow you to actually overdraw your account by writing a check, at the ATM or with debit card purchases.  The fee to overdraw your account is usually the same as a Non-Sufficient Funds fee and can cost you more then a payday loan – not a good option.


  • Click here to view a video on overdraft protection and what to watch
    out for.


  • To learn more about protecting yourself from overdraft and bounced-check fees click here.


  • Find out if you have, or can get overdraft protection on your checking account by calling your financial institution and asking about their relevant products.

Advances from Employers


Some employers grant paycheck advances to their employees.  Because this is a true advance on your next paycheck, and not a loan, there is no interest and the advance is therefore cheaper than a payday loan.

  • Ask your employer for an advance on your next paycheck – they would rather see you financially secure and ready to work than struggling to get out from under payday loans.

Consumer Credit Counseling


There are various consumer credit counseling agencies throughout the country that can help consumers work out a debt repayment plan with creditors or develop a budget.  These services are available at little or no cost.  Beware of agencies that claim to offer credit counseling, but actually charge hidden fees and provide little assistance with your current creditors.

  • Contact a nationally accredited consumer counseling agency in your area by calling 1-800-388-2227 or visiting www.debtadvice.org.


  • Do you sometimes feel there is too much month and not enough money?  Need to develop a budget, but don’t know where to start?  Click here for your free copy of Shape Up Your Spending.


  • Do you feel trapped in a cash crisis from time to time?  Some financial products sound good, but trap the unsuspecting consumer.  Click here for a free copy of Cash Crisis: Money Traps That Keep You Broke. 


  • Have you lost part of your income due to layoff, divorce, disability or death of a family member?  Need help?  Click here for your free copy of Living Resourcefully with Reduced Income.


  • Is your stack of monthly bills overweight?  Do you think your debts are too heavy?  With patience and “stick-to-it-iveness” you can trim your outstanding bills and other debts.  Click here for your free copy of Trim Your Credit Line - a step-by-step plan.


  • Are you unsure of your credit standing? Want to get a free copy of your personal credit bureau report?  Click here for Credit Help for Arkansans: Names and Numbers to Know.

Cash Advances on Credit Cards


Credit card cash advances, which are offered at about 7% - 25% APR, are much cheaper than getting a payday loan.  Some credit card companies specialize in consumers with financial problems or poor credit histories.  Consumers should shop around and not assume they do not qualify for a credit card.  Secured credit cards are another option.  A secured credit card is tied to a savings account.  The funds on the account 'secure' the amounts charged on the card.  Once a consumer has successfully used the secured card for a period of time, they can often qualify for a regular unsecured credit card.  Repayment choices are easier than a payday loan too.  When you receive your credit card statement you can: 1) choose to pay it all off, 2) pay the minimum payment, or 3) pay any amount in between that your budget can afford.


  • Consider a cash advance on a credit card by contacting your credit card company and asking about their rates on cash advances and/or secured credit cards.


  • Cash advances can be much less expensive than a payday loan and they are fast and easy to obtain from most financial institution tellers or at over one million ATM's worldwide. Click here for more information and cost comparison of a cash advance on credit cards vs. overdraft protection vs. a payday loan.


  • For more information on the best credit card deals and the ‘traps’ to watch for go to www.cardratings.com.

Credit Union Loans


Many credit unions offer small (often as low as $100), short-term loans to their members. Often the approval process is easier than a bank.  Some credit unions also offer free financial counseling and a savings plan to help members get back on their feet.  Credit unions offer very low interest rate loans (prime to 18% annual interest) with quick approval on an emergency basis.  Unlike payday loans, these loans give the borrowers a real chance to repay with longer payback periods and installment payments.  Moreover, banking with a credit union can allow you to build a positive credit rating and save for the future.


  • See if there is a credit union near you by entering your zip code at: www.creditunion.coop/cu_locator/.


  • Contact a credit union near you to find out if you are eligible to join.  Then inquire about their small loan products.


Military Relief Societies


Military relief societies offer no interest or low interest rate loans to retired and active duty military and their eligible family members in case of unforeseen and urgent financial need.  Situations include death of a family member, illness, natural disasters, vehicle repairs and no pay from the military.  If a service member is not able to repay, they may be eligible for a grant rather than a loan.

  • If you are active duty or retired military, contact Military OneSource at 1-800-464-8107 to find the installation nearest you with a family service center or support center that can help with financial problems.  In central Arkansas, call 501-987-6801, which is the Family Support Center on Little Rock Air Force Base for assistance.


  • If you are on Active Duty, you will find that small loans are available for
    any valid emergency. These loans are interest free and repayment term can extend up to 10 months and will be granted in the following maximum amounts:

    - Air Force $500 (Falcon Loans)
    - Army $1000 (Commander Referral Loan)
    - Navy & Marine Corp $300 (Quick Assist Loans)

Help From Friends and Family


Often, people are embarrassed or ashamed to ask for temporary financial assistance from friends or family.  However, a true friend would rather see you survive in the present without ruining your financial future by getting trapped by payday lenders.  Everyone gets in a bind occasionally and it’s OK to request help.

  • Ask to borrow money from a friend or relative.

Emergency Assistance Programs


Many state and Federal Government, faith-based groups, and community organizations provide emergency assistance, either directly or through social services programs. One example, is a partnership with state agencies, the Federal Low Income Home Energy Assistance Program which provides financial assistance to low-income households that are in a heating or cooling (weather) related emergency. A household that applies must: have at least one U.S. Citizen or a non-citizen who meets certain eligibility criteria; meet an income test; and be in a heating or cooling related emergency. Many other assistance programs exist to help low and moderate income individuals.

  • The Benefit Bank of Arkansas (phone:1-877-375-0790, email: thebenefitbankofar@yahoo.com, or website: www.thebenefitbank.com) is a free, internet-based system designed for use by a wide range of community-based, faith-based, governmental, job-training, healthcare, and social service agencies. It is a service that provides access to tax credits and public benefits for low and moderate income families. By maximizing tax refunds and reducing a family's household costs, it can relieve some of the pressures people face in trying to care for themselves and their loved ones.

    The Benefit Bank of Arkansas is designed as a counselor-assisted program. It creates dialogue between the client and the counselor through simple interview questions. The counselor (either a volunteer or an employee of the host organization) navigates the screens and types the client's responses. When all the questions necessary to fill out the application or complete the tax return have been answered, the system generates the appropriate forms, fully populated, for the client to review. Completed forms are then submitted electronically to minimize delay and maximize accuracy.


  • Locate additional local resources through a church, department of social services or other community organizations to see if you qualify for various types of financial assistance.

Costs of a Bounced Check or Late Fee


The typical payday loan is more than twice as expensive as a credit card late fee and much more expensive than paying bills late.  Payday loans are only cheaper for small amounts (i.e. $100) since late fees and bounced check fees are one-time flat fees that usually do not vary by loan amount.  In the average payday loan, the borrower receives $325 for two weeks and pays $52 in fees.  Here’s how that compares to some alternatives:



transaction chart



In addition, borrowers pay late fees only one time, unlike the revolving door of a payday loan where fees are paid every two weeks. In the end, the revolving door of payday loans is borrowing trouble, and only defers bounced checks, increases debt load and financial problems.


Payday Alternative Loan (PAL)


Arkansans Against Abusive Payday Lending (AAAPL) has developed an alternative product to the traditional Payday Loan for Banks and Credit Unions to offer their customers/members. This product, a Payday Alternative Loan (PAL), features a reasonable interest rate established by the Financial Institution, installment payments that fully amortize the loan in 6 – 12 months and a savings component that helps the borrower establish a savings account equal to the amount borrowed. If you are a bank or credit union and want more information about this product, click here.




Payday lenders are not the only option for consumers facing debt problems.  There are many alternatives to payday loans, such as: small savings accounts or rainy-day funds; salary advances from employers; credit card advances; working out extended repayment plans with creditors; and loans from friends, relatives, religious institutions or social service agencies.  In addition, many lenders have developed lower-cost alternatives to payday loans that have better repayment terms.


Adapted from information on