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As Americans' incomes shrink and credit gets harder to come by, several industries have stepped in to make it harder for people to get from paycheck to paycheck.

These businesses claim they're filling a void left by mainstream lenders. But if you fall into the clutches of any of these outfits, you can find yourself in a far deeper hole than you're in now, with much less money available to help you climb out.

Here are five businesses that you should be wary of and some alternatives that make more sense when money is tight.

1. Payday lenders

Only a handful of companies provided these high-cost loans in the early 1990s. Today, there are more than 19,000 payday loan outlets across the United States. (To give you a point of comparison, McDonald's, the largest fast-food chain, has about 14,000 restaurants in the U.S.)

To get a payday loan, you write a postdated check (with the date usually coinciding with your next paycheck) and accept a smaller amount as your loan. For each $100 you borrow, the fee is typically $10 to $15 for a 10-day loan, although it can be higher. That fee would translate into an annual interest rate of nearly 400%.

Your effective interest rate will skyrocket if you can't cover the check when payday rolls around and you opt to renew the loan.

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Liz Weston

Liz Weston

Payday loans were taking such a toll on our military men and women that a 2007 federal law limited the interest rate that service people could be charged on these loans (as well as vehicle title loans and tax refund anticipation loans) to 36%. Payday outlets that had infested areas near military bases cleared out virtually overnight.

Such protections don't apply to most civilians, however. Although payday loans are banned in 17 states -- Arkansas, Arizona, Connecticut, Georgia, Maine, Maryland, Massachusetts, Montana, New Jersey, New Hampshire, New York, North Carolina, Ohio, Oregon, Pennsylvania, Vermont and West Virginia -- and the District of Columbia, they're allowed in others and available online, so you'll need to protect yourself by steering clear.

Your best bet is to scrape up a few hundred bucks that you can keep in reserve so you won't need a payday loan. Read "Why you need $500 in the bank" for more about how to do that.

If a crisis hits before you have the cash, consider these alternatives:

  • Ask your employer for a real payday advance. If you need money from your paycheck early, some companies will advance it to you without charging fees or interest.
  • Get help paying your bills. Churches and other faith-based organizations may offer members emergency assistance. Low-income folks may be able to get help with utility bills, living expenses, child care costs, housing and a variety of other expenses. Start your search at
  • Get a loan from a credit union. These member-owned organizations often have better interest rates and more flexible lending standards than mainstream banks do. You can use Find a Credit Union if you're not already a member.
  • Take a cash advance from a credit card. Normally cash advances are a bad idea, since you usually pay an interest rate of 21% or more and there's no interest-free grace period. But if you have a credit card and your only alternative is a payday loan, the cash advance is clearly the better of bad options.

2. 'Buy here, pay here' car lots

Before the financial crisis, people with troubled credit often could get conventional, if high-interest, loans to buy cars.

These days, such subprime loans are harder to find, and millions have turned to "buy here, pay here" car lots -- so called because the dealers offer financing themselves, rather than through third parties, and borrowers typically have to show up at the lots to make their monthly or biweekly payments.

These dealers offer older, high-mileage cars, often with steep markups and loans that carry interest rates that can exceed 20%. The costs are so high that many borrowers fall behind on the loans, allowing the dealerships to repossess the cars and sell them again. Repossession rates are around 30%, according to the nonprofit Center for Responsible Lending, which says "collections and repossessions (are) a critical part of their business model."

Buy here, pay here lots now far outnumber conventional new-car dealerships, with 33,000 lots, compared with the new-car dealers' 20,000, according to CNW Marketing Research. Buy here, pay here dealers sold nearly 2.4 million cars nationwide last year, up from 1.3 million in 2000, CNW estimated.

Obviously, people would be far better off saving up cash to buy used vehicles from private parties or reputable dealerships. But your current car may give out before you have enough saved. If you don't live in an area with good public transportation, your alternatives may be few.

A credit union is certainly one place to turn for lower-cost loans, although not all potential borrowers will qualify. The Los Angeles Times, in investigating buy here, pay here dealerships, found about 160 charitable groups that help connect low-income people to affordable cars. But many areas have no such programs.