Erin (who prefers not to use her real name) admits that she has made some major money mistakes as a young adult.

Without family members to co-sign on a student loan for her, and with only a paycheck from her retail job to help her with bare-bones expenses, Erin felt the financial weight of her choices.

Turning to Payday Loan Banks

Sometimes it takes a trip inside the jaws of the (payday loan) sharks to learn a valuable life lesson: don't put your faith in payday loans.

“I thought that I had to go to college and live nearby campus. Honestly, I thought I had to do a lot of things a certain way, and that I would be in trouble if I didn’t. And that’s why I turned to them – payday loan banks.”

Erin first heard of payday loan businesses when she applied to work as a teller at one such outfit. “At my interview, they made it sound like they were helping people. It was a nice place with comfy couches for clients, and the tellers were in these black suits.’”

She did not get the job, but instead became a customer herself. Erin’s impression changed dramatically.

Despite walking out with a payday loan of $590 deposited in her bank account – enough to pay a portion of her fall tuition bill – she was shocked when she did the math.

The flat interest fee that her payday lender charged was $18 per $100, meaning that in two weeks, she would owe the payday lender the $590, plus $105 in interest.

“I didn’t have that. I was working as a fitting room attendant and going to school full-time. Honestly, I had no idea how I was going to pay that huge amount off.”

Erin’s story isn’t unique. In fact, Pew Charitable Trust reports that 12 million people use payday loans for small amounts, which are capped by most state laws at $300 to $1,000 (though some states do not have maximum amounts) with a 200 to 400 percent interest rate.

What happens when you can’t pay the loan back in full?

When it becomes impossible to pay the loan back in full, many lenders also offer the option to renew the loan for the same amount to continue making payments. But that comes with a fee.

In Erin’s case, this cost her an additional $50 per paycheck for each renewal. She renewed her original loan for over three months. In doing that, she racked up roughly $300 in fees. This brought her total cost of her loan to $405 over the original $590 loan.

“Each month felt like I was drowning. I dropped out of college and took on a second job. I started waitressing under the table so I could keep all my tips and use it to pay down the loan. It took me about four months to pay off everything.”

Payday lenders have come under much scrutiny lately as state and national lawmakers work to regulate the industry. But the regulations proposed and passed do not address the issue that people like Erin face – where to turn when money is needed, and needed now.

These borrowers often have credit scores that are too low for credit cards, or else have a limited credit history. When expenses such as medical bills or car repairs come up, they are unable to pay and will often turn to payday loans for help.


Programs with rental assistance

“When I couldn’t pay my lease, a friend told me about a church charity program in my community that assists with rent. I worked on weekends doing lawn work. In return, they paid my lease and utilities for two months.” Many communities and national programs, such as the Salvation Army, can step in when money is tight.

Before offering her rental assistance, the church charity required that Erin take financial literacy classes. Erin learned about credit building and took out a credit card designed for new borrowers. Monthly, she put her regular cell phone bill on the card and scheduled payments to pay it in full.

Her credit went from 590 to over 680 in just five months. This opened up the potential to apply for lower-interest credit cards or small personal loans from banks and credit unions.

Erin eventually turned to a professor from the college she dropped out of and managed to get a side job with a laboratory, cleaning up after classes. While it was only $50 per week for about six hours of work, she was able to save up an emergency fund of $1,500 in eight months. This gave her the confidence to go back to school the right way.


Unlike before, she isn’t going in blind. She also isn’t relying on student loans. The laboratory hired her on as a full-time assistant, allowing her to apply for and receive tuition assistance through her new employer’s program.

But even aside from her degree, she thinks she is coming out with an even more important life skill: “I’m now much stronger than I was when I started college and dropped out. I don’t want to give up as easily, and I am more cautious with my money. While I hate to admit it, using a payday lender and losing almost everything was one of the best things that ever happened to me.”

Many borrowers of payday loans are caught with high monthly payments. Aside from Salvation Army, local churches, and community groups, we would like to offer the following suggestions:

Proactive Payoff – if you’re considering a personal loan to help corral credit card debt, consider some newer options hitting the market. For example, a new company called Tally offers a way to track multiple credit cards, that can be consolidated within their app, and tracked on your phone. While this does require a bit higher credit score (650+), tools like Tally can help you get control of your finances before the need to get caught in a payday cycle!

Look for a low-cost personal loan. Depending on your credit score, you might qualify for a loan backed by your bank or local credit union.

If your local bank or credit union doesn’t have a low-cost personal loan, it may be best to check out a Peer to Peer Lender, such as Prosper. Some requirements are a little lower, and you may find a loan to help pay off your other loans.