Alternatives exist to help consumers avoid the debt-cycle

Debt leftover from Summer vacation.  New purchases for getting the kids back to school. An emergency car repair.

For some, these expenses can lead people into taking high-interest loans to cover their bills without realizing what they’re really getting into, said Debbie Richards, loan department manager at Eaton Family Credit Union.

The ability to quickly cover emergency expenses is generally what can make a short-term loan seem like a good solution, Richards explained. “According to BankRate, 61 percent of American households would not be able to pay for a $1,000 emergency out-of-pocket. That could make a quick injection of cash seem like an attractive option.”

But finance companies don’t give away these loans cheaply, Richards said. Western Financial, a third-party organization that connects borrowers with short-term lenders online, estimates that a $1,000 loan with a loan term of 12 months would come with a 24-percent interest rate, a 3-percent fee, and a nearly 30-percent APR.

Richards explained these high-interest rate loans also typically have a shorter amount of time to pay back the debt which can trap consumers in the cycle of debt.  “Predatory lenders also have been known to skirt legislation and create short-term loans that aren’t in the consumer’s best interest with plans of trapping them in the debt cycle.”

The US government has taken steps to regulate the small-dollar, short-term lending industry in recent years, Richards said.

In 2016, the Consumer Finance Protection Bureau instituted a rule aimed at short-term and longer-term credit products typically offered to financially vulnerable consumers. In short, the rule required all lenders to determine the borrower’s ability to pay the loan back. The rule also required lenders to provide notice when they were about to take money from a borrower’s account.

Short-term loans aren’t the only option to cover emergencies, Richards said. “Local credit unions have consistently helped hard-working Members reach their financial dreams by offering unique savings and loan options.”

Richards recommends a few alternatives to avoid short-term predatory loans:

• Create an emergency fund. The best way to avoid the necessity of a short-term, high-interest loan is to make sure you have enough saved to cover financial emergencies that may arise. Structure your budget so you’re putting a small amount per week into an emergency fund. Over time, it will add up to cover at least part of your next unexpected expense.
• Talk to your creditors. If you’re behind on bills, try talking to your creditors about working out a payment plan. Many will consider lowering or delaying payment to help you pay off the debt in full. Make sure you understand any additional fees that may be associated with the new plan.
• Consider a life insurance loan. Many whole-life insurance policies allow for loans as long as you have cash value in the policy. Borrowers have their entire lives to pay the loan back, and debts that aren’t repaid will be deducted from the amount the policy pays out after the holder dies.
• Find a quick way to earn cash. Consider picking up a side-gig or selling unwanted items for extra money that you won’t need to pay back. You may also want to look into apps that can make users extra cash such as Uber, Lyft, Airbnb and Wag!
• Try a personal installment loan. Personal, unsecured installment loans are offered by responsible lenders, including credit unions, banks and other financial institutions. In contrast to finance company loans, these products feature minimum 90-day repayment periods, installment options and limits on how often the loan can be renewed. Personal installment lenders also will take into account the borrower’s ability to pay and won’t use unfair collateral such as car titles.