Strapped for cash? How to get out of debt without getting burned

FAN Editor

If, like most Americans, you have multiple debts, consider restructuring them into a plan that is more manageable for your monthly budget. Your bank may be able to help with a debt consolidation loan, but tightening lending standards in the wake of the 2008 financial crisis have made bank loans either impossible to obtain or prohibitively expensive for borrowers with poor credit. Another option is a credit union.

Unlike banks, which are for-profit companies owned by shareholders, credit unions are nonprofit organizations owned by their members — in other words, their customers. That allows them to offer better terms than a bank on loans and deposits, according to the Credit Union National Association, which represents the more than 5,000 federally insured credit unions in the U.S. Some 115 million Americans belong to a credit union.

“Credit unions can be an excellent source of small personal loans, and they sometimes come with much lower interest rates and lower charges and fees,” Gorecki said.

Before you take out any type of loan, make sure you understand the terms, including the amount of interest you will pay. All should be clearly spelled out. If you don’t understand, don’t sign.

“The key here really is to compare and contrast all the options,” Gorecki said. “Take a look at the A.P.R., which is the annual percentage rate — not just the interest rate — and take a look at all the fees and the charges and any other terms associated with the loan or the cash advance that you’re receiving.”

You may also be able to get help from your employer in the form of an advance on your paycheck — like a payday loan but without the triple-digit interest rates.

“If consumers are able to obtain an advance on their paychecks from their employers, then they wouldn’t need to borrow money at all,” Gorecki said.

If your problems go deeper, or if you find yourself short of funds on a regular basis, you may want to turn to a credit counseling service.

“These agencies are usually nonprofits, and for a very low fee or no fee at all, they can generally help consumers create budgets,” Gorecki said. “They can help you work within your salary, they can help you work within your payment plan, and they can help you come up with a debt management solution that is more long term and does not require frequent, short-term infusions of cash.”

According to the National Federation for Credit Counseling, which offers an online directory of member agencies, a typical counseling session takes as little as 30 minutes. Most offer services over the phone, but you may also be able to work with a counselor online or in person. The counselor will ask questions about your finances, your challenges and goals, and will help you develop a plan to break the cycle of debt.

Does it ever make sense to turn to a payday lender? A national organization representing short-term lenders says they offer important benefits to the estimated 12 million Americans who use them.

“Small-dollar loans are an extremely valuable product and provide an important source of credit to millions of Americans,” says the Community Financial Services Association of America on its website. The group notes that 35 states still allow the loans on a “highly regulated” basis.

The organization has successfully fought some federal restrictions on the loans, arguing that denying consumers access to the credit can push them further into debt, or force them to seek out risky offshore lenders.

Even Gorecki conceded that payday loans can serve a purpose, within reason.

“Consumers should really consider taking out only as much as they will be able to cover with their next paycheck,” she said. “And consumers should also consider that their next paycheck is also going to be needed to pay for expenses that will take them until the following paycheck.”

In other words, borrow as little money as you possibly can. And do not allow the debt to roll over, because that is when finance charges start to pile up.

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