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Payday loans are quick and easy to obtain. They also levy outrageous interest rates and payback terms. Here's how to avoid them.

When they need cash quickly, millions of Americans willingly pay high interest — so steep, in fact, that they're often forced to take out a second loan to pay for the first.

And many keep doing it over and over.

Payday loans are a decided two-headed monster. For many, they’re a fast and easy solution when cash is short and bills are piling up. But astronomic interest rates that can hover near 400 percent have prompted federal regulators to consider legislation reining in payday loan terms and practices.

“Easy approval makes them seductive, but the chief problem is that this quick solution only serves to postpone their original problem, not erase it,” said Charles Green, managing director of the Small Business Finance Institute, a commercial lender training and publishing concern. “The consequences of a payday loan may be potentially disastrous, and prove to be exponentially more costly to consumers than the original obligation.”

No matter the fate of pending regulatory steps, it pays to avoid payday loans whenever possible. Here’s how.

A flourishing 'business'

It’s easy to understand the appeal of payday loans — they’re quick and easy to obtain and meet a need that many Americans struggle with. Loans range in size from $100 to $1,000, depending on state legal maximums. Lending requirements are a relative breeze. All that’s needed is an open bank account in relatively good standing, a steady source of income and personal ID. There’s no credit check or any research to determine if the borrower is in a position to pay the loan back.

The real kicker comes with loan terms. Interest rates can easily hit 400 percent. Moreover, a fast payback is generally required, usually in the vicinity of two weeks.

That may sound onerous, but millions readily accept those conditions. A study by the Financial Industry Regulatory Authority reported that 40 percent of Americans would find it difficult to piece together $2,000 within a month to meet an emergency.

Payday loans can send consumers into a financial spiral. Many, in fact, find themselves taking out additional payday loans just to pay off earlier loans.

“These type of loans often force people into a life of debt — a sort of debtors' prison,” said Bob Johnson, president and CEO of The American College of Financial Services, a financial education concern headquartered in Bryn Mawr, Pennsylvania. “The business model of these mercenary firms is to do just that — loan money to folks who take years to pay them off, making huge interest payments on relatively small initial loan amounts.”

Look to alternatives

Federal regulators are now weighing new payday rules that, among other guidelines, would require lenders to make sure borrowers can afford payments and allow for modest underwriting if loans terms are capped at much lower rates than currently imposed.

In the meantime, it’s sensible to look to any possible option other than payday loans if cash proves necessary. Start by asking family, friends or even your employer for a loan.

“The former offers compassion and concern to afford protection, while the latter might be willing to help a valued employee and good worker out of a tough spot that could disrupt their job,” said Green.

Another possibility is taking out a loan against a credit card. Although you can expect to pay an upfront fee and fairly steep interest rates (often as high as 30 percent and even more), a cash advance can make sense if you expect to pay back the loan quickly.

“This is not inexpensive as there is usually a fee that is associated with it, but if it is truly a short-term loan, the total cost will likely be less than a payday loan,” said Jim Wright, chief investment officer at Harvest Financial Partners.

Still another choice is taking a loan by way of a 401(k) retirement plan. The plus side is that they can be suitable if the amount of cash needed is substantial (many plans allow you to borrow up to 50 percent of your plan balance). Moreover, market interest rates usually apply and any interest paid goes back into your 401(k).

But approach a 401(k) loan with caution. For one thing, it’s never a good idea to touch any money earmarked for retirement unless it’s absolutely necessary. Additionally, it can prove all the more expensive should you leave the job associated with the 401(k).

“If you don’t pay off the loan before you leave the firm, any unpaid amount is considered an early distribution if you’re younger than 59½ years,” said Wright. “You’ll pay tax and a 10 percent penalty.”

Finally, don’t by shy about trying to negotiate more lenient payback terms if money from a payday loan would go toward a bill of some sort. For instance, putting up some form of collateral could convince an auto body shop to allow you a couple more weeks to piece together funds for a major repair or refurbishing. As Green noted: “The consumer shouldn’t let pride stop them from first seeking help over having to deal with a jaded money broker.”

Jeff Wuorio lives in southern Maine, where he covers personal finance and entrepreneurship. He may be reached at [email protected], and his website is at jeffwuorio.com.