CHARLESTON, W.Va. -- As the number of people who get money through non-bank credit options, including "payday lenders," continues to rise, some advocates are reminding consumers that such deals usually aren't worth it.
"By all means, these types of loans should not be used as supplemental income," said Amanda Tietze, vice president of the Better Business Bureau in West Virginia. "They should be used for emergency purposes only."
A recent Urban Institute study on non-traditional credit use looked at four kinds of non-bank credit lending methods: payday loans, pawnshop loans, rent-to-own deals and "refund anticipation" loans.
From January 2009 to June 2011, the percentage of households where one person had ever used a non-bank credit product rose from 11.8 percent to 14.2 percent, according to the report.
The country was in an economic recession for much of that time, and people who are "normally considered economically advantaged: older, non-minority, better educated, married and higher income" were disproportionately more likely to start using questionable credit, the Urban Institute report stated.
Tietze said the Better Business Bureau recommends people shop around carefully and consider interest rates and other fees before taking out any loan. Tietze suggested checking with local credit unions, or seeking a small loan from a bank.
"If you don't have the funds available on your next paycheck, we are often finding consumers are getting caught in the payday loan trap or cycle," Tietze said. "The loans start stacking on top of each other and once you get into that cycle it is very, very difficult to get out of it and pay back all those loans."
Former Attorney General Darrell McGraw's office sued dozens of payday lenders because their terms violated West Virginia law. But Tietze said some companies allow consumers in states where those types of payday loans are illegal to secure the loans online.
"By the time it is all said and done you are paying 300 percent interest on the amount of money you were originally loaned," she said. "It's really not an economically sound way to fix the problem."
The BBB also recommends people use their local nonprofit consumer credit council service. The group offers credit guidance and budgeting to consumers for little or no cost.
The latest unemployment numbers for August from the Bureau of Labor Statistics showed national unemployment at 7.3 percent, while WorkForce West Virginia's data showed the state's unemployment rate at 6.3 percent.
Stephanie Klein, director of consumer lending for NetCredit, said there is a need for new products to fill the credit gap for those consumers "who have really been left behind by the banks." She said the company specializes in small-short-term-personalized loans.