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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 Benefits.gov.
  • 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.

3. Used-car leasing

Here's an even more lucrative (for dealers) twist on the buy here, pay here model: lease here, pay here.

Instead of selling clunkers, lots lease them to drivers with poor credit who desperately need cars to get to work. The drivers often pay $1,500 to $2,000 upfront and then hundreds of dollars a month for a high-mileage car.

Dealers retain the cars' titles, so they don't have to go through formal repossession procedures. If you stop paying, they simply come take the car or disable it with a remote ignition lock. The terms of the lease can't be altered if the driver files for bankruptcy -- unlike auto loans, which a judge can restructure. And the deals typically aren't subject to state usury laws that limit interest rates.

The Los Angeles Times highlighted a lawsuit by Kai Harris of Clarkston, Mich., who is suing a dealership in federal court, saying her lease of a 2008 Jeep Patriot amounted to an interest rate of 38.5%, far above the state's auto loan limit of 25%. Harris paid $2,000 upfront and agreed to pay $124 a week for three years for the car, a total of $21,344 for a car with an initial value of less than $12,000. The lawsuit calls it "a usurious credit sale disguised as a lease."

As bad a deal as buy here, pay here can be, you would have more consumer protections financing a vehicle that way than leasing it.

4. Rent to own

About 6 million Americans pay dearly for their impatience. These people are customers of the $7 billion rent-to-own industry, which specializes in getting people to pay two to four times the retail cost for furniture, computers, appliances, electronics and even tire rims.

Many people never finish paying these inflated prices, which means they get a visit from the repo men taking the stuff back. And the truly horrible thing about rent to own is that people have plenty of alternatives to participating in this racket.

When I wrote about rent-to-own stores a few years ago, I found a Rent-a-Center in North Hollywood, Calif., offering a Klaussner couch, love seat and coffee table for $44.99 a week for 83 weeks, which worked out to about $2,000 more than the $1,657 the set would cost if you paid cash.

On Craigslist, I found a Klaussner couch selling for $200. If you put aside the $45 a week, you would have enough to buy it in less than five weeks. In all, there were 1,453 listings selling couches, 2,269 listings for sofas and 542 listings for love seats. Plenty were gently used and selling for $100 or less, sometimes a lot less.

At another Rent-a-Center, in Van Nuys, Calif., a used bunk-bed set was on offer for $22.96 a week for 65 weeks, or nearly $1,500, compared with a cash price of $663. Of course, Craigslist was littered with ads for used bunk beds for a fraction of that, and Ikea had a brand-new bunk bed set for just $149, with mattresses starting at $69. Anyone who needed bunk beds could save up by putting aside the same $23 a week the Rent-a-Center wanted and buying a set outright in about three months.

You don't have to be that savvy or thrifty a shopper to get a better deal than rent to own.

5. Banks

A 2008 Federal Deposit Insurance Corp. study found that people earning less than $30,000 were far more likely to incur overdraft fees than those with higher incomes. More than 38% of low-income accounts had at least one insufficient-funds transaction, compared with 22% of upper-income accounts. Among the low-income customers, 16.7% of accounts had one to four overdraft transactions, and 7.5% had 20 or more NSF transactions. That compared with 10.5% of upper-income accounts with one to four overdraft transactions accounts and 3.8% with 20 or more.

At the time, most banks were automatically enrolling customers in so-called bounce-protection plans that allowed overdrafts and then levied a $30 to $35 fee for each over-limit transaction. Concern about the programs' effect on low-income people and seniors on fixed incomes helped lead Congress to abolish the programs and require banks to get consumers' consent. Most people have opted out.

Now banks are finding other ways to ding those who have trouble maintaining big balances in their accounts. The primary method: monthly "maintenance" or account fees. Bankrate.com's 2011 Checking Survey found only 45% of noninterest accounts are free, compared with 65% in 2010 and 76% in 2009. The monthly fees often range from $8 to $15.

Burned by fees, many lower-income families have given up on banks. Nearly 20% of households with incomes under $30,000 don't maintain bank accounts, according to the FDIC.

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You may be able to avoid the fees by setting up direct deposit of your paycheck. Or you may need to look for a new financial institution. Credit unions, community banks and online banks may offer no-minimum accounts or lower fees.

Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.