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    Payday Loans Out of Control? Get Help Now.

    November 11,2009

    Dear Carrie,

    I'm 55 years old and I got out of my 401(k) plan. I have a lot of payday loans, and I'm really struggling. Can you offer me any advice?

    —A Reader

    Dear Reader,

    I’m so glad that you wrote in. If you're mired in payday loans, your situation is serious and you need to get on another path quickly. You've taken the first step by reaching out for help and I applaud you for that. As you know from experience, payday loans are probably the most costly source of money. While on the surface it may seem that you're paying a small fee for a small loan, the interest is really astronomical. According to a recent Federal Trade Commission Consumer Alert, if you pay $15 to borrow $100 for two weeks, the actual annual percentage rate is 391 percent! Keep rolling over the loan instead of paying it back and you're charged another $15 every time you roll it over. Pretty soon you owe much more than the original debt and the interest rate just keeps going up. So your next step is to put on the brakes—immediately.

    Look for less costly sources of cash

    The first thing you need to do is stop the payday loan cycle. So consider if there are any less costly sources of money that could help you cover your immediate payday debts. Depending on how much you owe, you might:

    • Ask a family member or friend if they would be willing to loan you the money at a more reasonable rate. You could draw up an agreement with a specific interest rate for a set amount of time and formalize your repayment schedule.
    • Look into a loan from a credit union or small loan company. Some companies specifically offer short-term loans at far lower rates as an alternative to payday lenders.
    • Get a cash advance on a credit card. Yes, the interest rates are high, but nowhere near as high as you're most likely paying now.

    Contact a credit counselor

    I also advise you to seek professional guidance from a credit counselor. But beware. There are many scam artists out there promising to consolidate your debts and lower you payments to a fraction of what they are now. Remember: if it sounds too good to be true, it probably is, so don't be lured by the idea of a quick fix. Instead, turn to an approved nonprofit counseling agency.

    For instance, the National Foundation for Credit Counseling has Consumer Credit Counseling Services nationwide that can provide genuine help at little or no cost. Another resource is the Association of Independent Consumer Credit Counseling Agencies. Through organizations like these you can find a counselor in your area who will review your personal situation, help you come up with a debt management plan and—equally important—help you learn how to avoid getting into unmanageable debt in the future.

    Put yourself on a strict budget

    Since you're already struggling financially this may sound obvious, but to retake control of your money, you have to know exactly where it's going. Sit down and list all your current expenses: rent or mortgage payment, utilities, car expenses, groceries, clothing, entertainment. Where else are you spending money that you could save or put toward your debts? Carving out just a few extra dollars a month can help you get out of the red.

    Ideally, as you get a handle on your current situation, you'll start to put some money away as an emergency fund—a fund you can draw on instead of taking a payday loan. Even an extra $500 tucked away can help keep you from spiraling down deeper into debt.

    And one more thing. You say you "got out of your 401(k) plan." Does that mean you cashed out and used the money or that you just stopped contributing to it? If your retirement savings are gone, you have an even greater reason to seek help in getting back on track with your finances. But the good news is, there is help available. Please use these ideas as a motivation to take action. And do it right away. Even at 55 you have time ahead of you to turn things around.

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