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LEGAL MATTERS: Better Alternatives to Payday Loans

Wednesday, November 07, 2012


Payday loans are an insidious trap with astronomical interest rates. Are there better options?

During a recent televised football game, an advertisement came on for a company offering fast, easy loans. Part of the pitch stated that the loans were cheaper than payday loans. When the written disclosure flashed on the screen our friend howled – “Did that just say 90 percent interest? What the heck is the interest on a payday loan?” Good question.

Hold onto your hats -- payday loans in Rhode Island that we recently reviewed had APRs running between 255 percent to just over 260 percent.

An insidious trap

Under the contracts we reviewed, at the time of the loan, borrowers were required to give the lender a post-dated check for the amount of the loan plus a fee. The loans were due EXACTLY two weeks from the date of origination and if not paid in full by the due date, the lender was authorized to process the check. The process can become an insidious trap if the borrower refinances the loan on the due date by either paying the finance charge or rolling it into another payday loan. It doesn’t take a CPA to forecast financial Armageddon for many distressed borrowers.

In 2006, Congress barred payday lenders from making loans with these exhorbitant rates to active duty service members and capped the rate at 36 percent.

In Rhode Island, Rep. Frank Ferri and Sen. Juan Pichardo recently sponsored legislation to adopt this loan cap. Although the legislation did not pass, supporters have promised to reintroduce it this year.

Better options

Anyone considering a payday loan is well advised to stop and calmly consider all their options. Any of the following may well be a sensible alternative  to these financial wrecking machines.

  • Personal loan from a bank
  • Sale of jewelry, precious metals or collectibles
  • Financial assistance from friends or family members
  • An advance of pay from an employer
  • Short-term use of a credit card

If none of the above alternatives are available, there are a number of creditors who will work with a debtor faced with an unusual, unforeseen financial crisis. Contacting the creditor and informing them of the financial crisis can result in mortgage holders, credit card companies and others forgoing a monthly payment, yet keeping the account current

NeighborWorks Blackstone River Valley, a non-profit member of the RI Coalition for Payday Reform, has noted that the following alternatives are being offered: 

  • Capitol Good Fund lends $2000 loans at 15% APR. 
  • West Elmwood Housing Development Corporation is piloting the “Neighborhood Loan Store” that makes loans up to $1500 at 18-25% APR.
  • Navigant Credit Union also recently launched “Smart Start” a safe, easily accessed alternative product at all of their branches. They loan $600, with a 90-day term, no credit required.

No matter what you do, seek credit counseling. You can obtain information about a nationally accredited consumer counseling agency in your local area by calling 1-800-388-2227.

The foregoing is offered for informational purposes only and is not legal advice nor does it create an attorney-client relationship.

Susan G. Pegden is a litigation associate with the Law Firm of Hamel, Waxler, Allen & Collins in Providence.  She is admitted to practice in Rhode Island and Massachusetts and is a member of the American Association of Justice, the Board of Governors of the Rhode Island Association of Justice (RIAJ) and a member of the Rhode Island Women’s Bar Association.

Sean P. Feeney is a partner with the Law Firm of Hamel, Waxler, Allen & Collins. He is admitted to practice in Rhode Island, Illinois and Wisconsin. Mr. Feeney is a former special counsel to the City of Providence, military prosecutor with the United States Marine Corps and Special Assistant United States Attorney for the Central District of California.


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